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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: September 30, 2012
Commission file number: 0-10997
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: 19,290,175 shares outstanding as of October 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 | 53 | |||
Item 4. | Controls and Procedures | 53 | |||
PART II: OTHER INFORMATION | 54 | ||||
Item 1. | Legal Proceedings | 54 | |||
Item 1A. | Risk Factors | 54 | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 56 | |||
Item 3. | Defaults Upon Senior Securities | 56 | |||
Item 4. | Mine Safety Disclosures | 56 | |||
Item 5. | Other Information | 56 | |||
Item 6. | Exhibits | 56 | |||
SIGNATURES | 57 |
PART I: FINANCIAL
INFORMATION
Item 1. Financial Statements (Unaudited)
WEST COAST BANCORP
CONSOLIDATED
BALANCE SHEETS
September 30, | December 31, | |||||||
(Dollars and shares in thousands, unaudited) | 2012 | 2011 | ||||||
ASSETS | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 53,026 | $ | 59,955 | ||||
Federal funds sold | 3,426 | 4,758 | ||||||
Interest-bearing deposits in other banks | 44,883 | 27,514 | ||||||
Total cash and cash equivalents | 101,335 | 92,227 | ||||||
Investment securities available for sale, at fair value | ||||||||
(amortized cost: $773,856 and $717,593, respectively) | 792,657 | 729,844 | ||||||
Federal Home Loan Bank stock, held at cost | 12,040 | 12,148 | ||||||
Loans held for sale | - | 3,281 | ||||||
Loans | 1,490,767 | 1,501,301 | ||||||
Allowance for loan losses | (31,457 | ) | (35,212 | ) | ||||
Loans, net | 1,459,310 | 1,466,089 | ||||||
Premises and equipment, net | 22,672 | 24,374 | ||||||
Other real estate owned, net | 21,939 | 30,823 | ||||||
Bank owned life insurance | 26,895 | 26,228 | ||||||
Other assets | 39,132 | 44,873 | ||||||
Total assets | $ | 2,475,980 | $ | 2,429,887 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Deposits: | ||||||||
Demand | $ | 704,810 | $ | 621,962 | ||||
Savings and interest bearing demand | 499,934 | 495,117 | ||||||
Money market | 588,635 | 625,373 | ||||||
Time deposits | 135,913 | 173,117 | ||||||
Total deposits | 1,929,292 | 1,915,569 | ||||||
Short-term borrowings | 35,000 | - | ||||||
Long-term borrowings | 92,900 | 120,000 | ||||||
Junior subordinated debentures | 51,000 | 51,000 | ||||||
Reserve for unfunded commitments | 831 | 771 | ||||||
Other liabilities | 30,961 | 28,068 | ||||||
Total liabilities | 2,139,984 | 2,115,408 | ||||||
Commitments and contingent liabilities (Note 8) | ||||||||
Stockholders' equity: | ||||||||
Preferred stock: no par value, 10,000 shares authorized; | ||||||||
Series B issued and outstanding: 121 at September 30, 2012 and December 31, 2011 | 21,124 | 21,124 | ||||||
Common stock: no par value, 50,000 shares authorized; | ||||||||
issued and outstanding: 19,290 at September 30, 2012 and 19,298 at December 31, 2011 | 231,766 | 230,966 | ||||||
Retained earnings | 71,692 | 54,952 | ||||||
Accumulated other comprehensive income | 11,414 | 7,437 | ||||||
Total stockholders' equity | 335,996 | 314,479 | ||||||
Total liabilities and stockholders' equity | $ | 2,475,980 | $ | 2,429,887 |
See notes to consolidated financial statements.
- 3 -
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars and shares in thousands, except per share amounts) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
INTEREST INCOME: | ||||||||||||||||
Interest and fees on loans | $ | 18,706 | $ | 20,060 | $ | 56,614 | $ | 60,590 | ||||||||
Interest on taxable investment securities | 3,439 | 4,092 | 10,647 | 12,437 | ||||||||||||
Interest on nontaxable investment securities | 546 | 534 | 1,547 | 1,548 | ||||||||||||
Interest on deposits in other banks | 35 | 35 | 91 | 166 | ||||||||||||
Interest on federal funds sold | - | - | 1 | 2 | ||||||||||||
Total interest income | 22,726 | 24,721 | 68,900 | 74,743 | ||||||||||||
INTEREST EXPENSE: | ||||||||||||||||
Savings, interest bearing demand deposits and money market | 183 | 392 | 560 | 1,846 | ||||||||||||
Time deposits | 202 | 594 | 833 | 2,425 | ||||||||||||
Short-term borrowings | 37 | 282 | 42 | 328 | ||||||||||||
Long-term borrowings | 315 | 1,060 | 959 | 3,670 | ||||||||||||
Borrowings prepayment charge | - | 2,775 | - | 2,775 | ||||||||||||
Junior subordinated debentures | 302 | 277 | 913 | 885 | ||||||||||||
Total interest expense | 1,039 | 5,380 | 3,307 | 11,929 | ||||||||||||
Net interest income | 21,687 | 19,341 | 65,593 | 62,814 | ||||||||||||
Provision (benefit) for credit losses | (593 | ) | 1,132 | (996 | ) | 6,634 | ||||||||||
Net interest income after provision for credit losses | 22,280 | 18,209 | 66,589 | 56,180 | ||||||||||||
NONINTEREST INCOME: | ||||||||||||||||
Service charges on deposit accounts | 3,017 | 3,129 | 9,047 | 10,348 | ||||||||||||
Payment systems related revenue | 3,073 | 3,201 | 9,230 | 9,300 | ||||||||||||
Trust and investment services revenue | 1,231 | 1,033 | 3,623 | 3,389 | ||||||||||||
Gains on sales of loans | 492 | 222 | 1,949 | 1,035 | ||||||||||||
Other real estate owned valuation adjustments | ||||||||||||||||
and (loss) gain on sales | (457 | ) | (11 | ) | (2,061 | ) | (1,255 | ) | ||||||||
Gain (loss) on securities, net: | ||||||||||||||||
Gains on sales of securities | - | 124 | 375 | 521 | ||||||||||||
Other-than-temporary impairment losses on securities | - | - | (1,726 | ) | (1,636 | ) | ||||||||||
Portion of other-than-temporary, non-credit related losses | ||||||||||||||||
recognized in other comprehensive income | - | - | 1,677 | 1,457 | ||||||||||||
Total net gains on securities | - | 124 | 326 | 342 | ||||||||||||
Other noninterest income | 816 | 716 | 2,439 | 2,241 | ||||||||||||
Total noninterest income | 8,172 | 8,414 | 24,553 | 25,400 | ||||||||||||
NONINTEREST EXPENSE: | ||||||||||||||||
Salaries and employee benefits | 11,499 | 11,977 | 35,058 | 35,973 | ||||||||||||
Equipment | 1,480 | 1,461 | 4,726 | 4,553 | ||||||||||||
Occupancy | 1,901 | 2,115 | 6,095 | 6,512 | ||||||||||||
Payment systems related expense | 1,148 | 1,279 | 3,342 | 3,876 | ||||||||||||
Professional fees | 777 | 1,038 | 2,948 | 2,996 | ||||||||||||
Postage, printing and office supplies | 735 | 772 | 2,283 | 2,444 | ||||||||||||
Marketing | 520 | 862 | 1,087 | 2,344 | ||||||||||||
Communications | 411 | 387 | 1,210 | 1,154 | ||||||||||||
Merger expenses | 578 | - | 578 | - | ||||||||||||
Other noninterest expense | 2,258 | 2,729 | 6,481 | 8,279 | ||||||||||||
Total noninterest expense | 21,307 | 22,620 | 63,808 | 68,131 | ||||||||||||
INCOME BEFORE INCOME TAXES | 9,145 | 4,003 | 27,334 | 13,449 | ||||||||||||
PROVISION (BENEFIT) FOR INCOME TAXES | 3,201 | (2,273 | ) | 9,567 | (2,566 | ) | ||||||||||
NET INCOME | $ | 5,944 | $ | 6,276 | $ | 17,767 | $ | 16,015 | ||||||||
Basic earnings per share | $ | 0.29 |
$ |
0.31 |
$ |
0.87 |
$ |
0.78 | ||||||||
Diluted earnings per share | $ | 0.27 |
$ |
0.29 |
$ |
0.82 |
$ |
0.75 | ||||||||
Weighted average common shares | 19,110 | 19,029 | 19,077 | 18,999 | ||||||||||||
Weighted average diluted shares | 20,344 | 19,880 | 20,225 | 19,951 |
See notes to consolidated financial statements.
- 4 -
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended | Nine months ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(Dollars in thousands, unaudited) | 2012 | 2011 | 2012 | 2011 | |||||||||||
Net income | $ | 5,944 | $ | 6,276 | $ | 17,767 | 16,015 | ||||||||
Other comprehensive income, net of tax: | |||||||||||||||
Unrealized holding gains on securities: | |||||||||||||||
Unrealized holding gains arising during the period | 4,512 | 7,665 | 6,877 | 12,686 | |||||||||||
Tax provision | (1,773 | ) | (3,011 | ) | (2,701 | ) | (4,997 | ) | |||||||
Unrealized holding gains arising during the period, net of tax | 2,739 | 4,654 | 4,176 | 7,689 | |||||||||||
Less: Reclassification adjustment for net other-than-temporary | |||||||||||||||
impairment losses on securities | - | - | 49 | 179 | |||||||||||
Tax benefit | - | - | (19 | ) | (70 | ) | |||||||||
Other-than-temporary impairment losses on securities, net of tax | - | - | 30 | 109 | |||||||||||
Less: Reclassification adjustment for net | |||||||||||||||
gains on sales of securities | - | (124 | ) | (375 | ) | (521 | ) | ||||||||
Tax provision | - | 48 | 146 | 203 | |||||||||||
Gains on sales of securities, net of tax | - | (76 | ) | (229 | ) | (318 | ) | ||||||||
Other comprehensive income, net of tax | 2,739 | 4,578 | 3,977 | 7,480 | |||||||||||
Total net comprehensive income | $ | 8,683 | $ | 10,854 | $ | 21,744 | 23,495 |
See notes to consolidated financial statements.
- 5 -
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended | ||||||||
(Dollars in thousands, unaudited) | September 30, 2012 | September 30, 2011 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 17,767 | $ | 16,015 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, amortization and accretion | 6,418 | 6,389 | ||||||
Amortization of tax credits | 489 | 682 | ||||||
Deferred income tax expense | 5,226 | 1,687 | ||||||
Amortization of intangibles | - | 358 | ||||||
Provision (benefit) for credit losses | (996 | ) | 6,634 | |||||
Decrease (increase) in accrued interest receivable | 221 | (541 | ) | |||||
Increase in other assets | (2,782 | ) | (3,388 | ) | ||||
Loss on impairment of securities | 49 | 179 | ||||||
Gains on sales of securities | (375 | ) | (521 | ) | ||||
Net loss on disposal of premises and equipment | 41 | 305 | ||||||
Net other real estate owned valuation adjustments and (loss) gain on sales | 2,061 | 1,255 | ||||||
Gains on sales of loans held for sale | (1,457 | ) | (1,035 | ) | ||||
Origination of loans held for sale | (9,510 | ) | (27,474 | ) | ||||
Proceeds from sales of loans held for sale | 14,248 | 29,610 | ||||||
Decrease in interest payable | (45 | ) | (2,085 | ) | ||||
Increase in other liabilities | 1,430 | 1,363 | ||||||
Increase in cash surrender value of bank owned life insurance | (667 | ) | (653 | ) | ||||
Stock based compensation expense | 1,168 | 1,452 | ||||||
Excess tax benefits associated with stock plans | (124 | ) | (53 | ) | ||||
Net cash provided by operating activities | 33,162 | 30,179 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from maturities of available for sale securities | 183,705 | 198,778 | ||||||
Proceeds from sales of available for sale securities | 32,859 | 39,193 | ||||||
Proceeds from redemption of FHLB stock | 108 | - | ||||||
Purchase of available for sale securities | (276,585 | ) | (406,429 | ) | ||||
Loans made to customers less than principal collected on loans | 11,499 | 10,204 | ||||||
Purchase of loans | (8,255 | ) | - | |||||
Proceeds from the sale of other real estate owned | 11,424 | 20,392 | ||||||
Capital expenditures on other real estate owned | (69 | ) | (521 | ) | ||||
Capital expenditures on premises and equipment | (772 | ) | (1,845 | ) | ||||
Net cash used by investing activities | (46,086 | ) | (140,228 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase in demand, savings and interest | ||||||||
bearing transaction accounts | 51,566 | 138,705 | ||||||
Net decrease in time deposits | (37,204 | ) | (88,449 | ) | ||||
Proceeds from issuance of short-term borrowings | 97,000 | 55,818 | ||||||
Repayment of short-term borrowings | (97,000 | ) | (67,200 | ) | ||||
Proceeds from issuance of long-term borrowings | 7,900 | 50,000 | ||||||
Repayment of long-term borrowings | - | (49,118 | ) | |||||
Proceeds from issuance of common stock-stock options | 92 | 74 | ||||||
Fractional share payment | - | (18 | ) | |||||
Redemption of stock pursuant to stock plans | (499 | ) | (509 | ) | ||||
Excess tax benefits associated with stock plans | 124 | 53 | ||||||
Activity in deferred compensation plan | 53 | (20 | ) | |||||
Net cash provided by financing activities | 22,032 | 39,336 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 9,108 | (70,713 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 92,227 | 177,991 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 101,335 | $ | 107,278 |
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 |
$ |
- | - | $ | - | $ | 17,767 | $ | - | $ | 17,767 | ||||||||||
Other comprehensive income, net of tax: | - | - | - | - | 3,977 | 3,977 | |||||||||||||||
Cash dividends, $.05 per common share | - | - | - | (1,027 | ) | - | (1,027 | ) | |||||||||||||
Redemption of stock pursuant to stock plans | - | (45 | ) | (499 | ) | - | - | (499 | ) | ||||||||||||
Activity in deferred compensation plan | - | (1 | ) | 53 | - | - | 53 | ||||||||||||||
Issuance of common stock-stock options | - | 8 | 92 | - | - | 92 | |||||||||||||||
Issuance of common stock-restricted stock | - | 30 | - | - | - | - | |||||||||||||||
Stock based compensation expense | - | - | 1,168 | - | - | 1,168 | |||||||||||||||
Tax adjustment associated with stock plans | - | - | (14 | ) | - | - | (14 | ) | |||||||||||||
BALANCE, September 30, 2012 | $ | 21,124 | 19,290 | $ | 231,766 | $ | 71,692 | $ | 11,414 | $ | 335,996 |
See notes to consolidated financial statements.
- 7 -
WEST COAST BANCORP
(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 nine months ended September 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 nine months ended September 30, 2012, and 2011.
(Dollars in thousands) | Nine months ended | ||||||
September 30, | |||||||
2012 | 2011 | ||||||
Supplemental cash flow information: | |||||||
Cash paid (received) in the period for: | |||||||
Interest | $ | 3,352 | $ | 14,015 | |||
Income taxes | 5,425 | 6,529 | |||||
Noncash investing and financing activities: | |||||||
Change in unrealized gain on available | |||||||
for sale securities, net of tax | $ | 3,977 | $ | 7,480 | |||
Settlement of secured borrowings | - | (3,085 | ) | ||||
Transfer of long term debt to short term debt | 35,000 | 39,200 | |||||
OREO and premises and equipment expenditures | |||||||
accrued in other liabilities | $ | 13 | $ | 12 | |||
Transfer of loans to OREO | 4,532 | 11,906 | |||||
Dividends declared and accrued
in
other liabilities |
1,027 | - |
- 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 as 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.
2. PROPOSED MERGER WITH COLUMBIA BANKING SYSTEM, INC.
On September 25, 2012, Bancorp entered into an Agreement and Plan of Merger (the Merger Agreement) with Columbia Banking System, Inc., (Columbia), a Washington corporation, pursuant to which a newly formed subsidiary of Columbia will merge with and into Bancorp (the Merger), with Bancorp continuing as the surviving corporation (the Surviving Corporation). As soon as reasonably practicable following the Merger, and as part of a single integrated transaction, the Surviving Corporation will be merged with and into Columbia (the Second Step Merger and together with the Merger, the Mergers). Consummation of the Merger remains subject to customary closing conditions, including receipt of requisite shareholder and regulatory approvals. Certain terms of the Merger Agreement and other related agreements are summarized in, and the Merger Agreement has been filed as an exhibit to, the Current Report on Form 8-K filed by Bancorp with the Securities and Exchange Commission on October 1, 2012.
In connection with the proposed Merger, Bancorp has incurred Merger-related expenses of approximately $0.6 million, principally legal and professional services, for the three months ended September 30, 2012.
- 9 -
3. 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 372,166 shares available for grant at September 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 one, two to four year vesting 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:
Nine months ended | ||||||
September 30, 2012 | ||||||
Weighted Average | ||||||
Common Shares | Exercise Price per share | |||||
Balance, beginning of period | 257,080 | $ | 70.12 | |||
Granted | - | - | ||||
Exercised | (7,945 | ) | 11.55 | |||
Forfeited/expired | (43,714 | ) | 75.93 | |||
Balance, end of period | 205,421 | $ | 71.15 |
The following table presents information on stock options outstanding for the periods shown:
Nine months ended | Nine months ended | |||||
(Dollars in thousands, except share and per share data) | September 30, 2012 | September 30, 2011 | ||||
Stock options vested and expected to vest: | ||||||
Number | 205,421 | 253,461 | ||||
Weighted average exercise price per share | $ | 71.15 | $ | 69.93 | ||
Aggregate intrinsic value | $ | 691 | $ | 174 | ||
Weighted average contractual term of options | 3.9 years | 4.4 years | ||||
Stock options vested and currently exercisable: | ||||||
Number | 205,371 | 252,990 | ||||
Weighted average exercise price per share | $ | 71.16 | $ | 70.14 | ||
Aggregate intrinsic value | $ | 690 | $ | 179 | ||
Weighted average contractual term of options | 3.9 years | 4.3 years | ||||
Unearned compensation related to stock options | $ | - | $ | 28 |
There were no stock option grants for the nine months ended September 30, 2012, and 2011.
- 10 -
3. STOCK PLANS
The following table presents information on restricted stock outstanding for the period shown:
Nine months ended | |||||
September 30, 2012 | |||||
Weighted Average Market | |||||
Restricted Shares | Price at Grant | ||||
Balance, beginning of period | 264,631 | $ | 16.98 | ||
Granted | 29,673 | 19.05 | |||
Vested | (95,132 | ) | 18.18 | ||
Forfeited | (19,714 | ) | 15.89 | ||
Balance, end of period | 179,458 | $ | 16.80 | ||
Weighted average remaining recognition period | 1.8 years |
The balance of unearned compensation related to restricted shares as of September 30, 2012, and September 30, 2011, was $2.4 million and $3.8 million, respectively.
The following table presents stock-based compensation expense for the periods shown:
Three months ended | Nine months ended | ||||||||||
September 30, | September 30, | ||||||||||
(Dollars in thousands) | 2012 | 2011 | 2012 | 2011 | |||||||
Restricted stock expense | $ | 375 | $ | 409 | $ | 1,153 | $ | 1,384 | |||
Stock option expense | - | 14 | 15 | 68 | |||||||
Total stock-based compensation expense | $ | 375 | $ | 423 | $ | 1,168 | $ | 1,452 |
The income tax benefit recognized in the income statement for restricted stock compensation expense in the three and nine months ended September 30, 2012, was $131,000 and $404,000, respectively. The income tax benefit recognized in the income statement for restricted stock compensation expense in the three and nine months ended September 30, 2011, was $155,000 and $526,000, respectively.
The cash received from stock option exercises was $22,000 and $92,000 for the three and nine months ended September 30, 2012, respectively. The Company recorded $13,000 and $168,000 of tax expense from disqualifying dispositions involving incentive stock options, the exercise of non-qualified stock options, and the vesting and release of restricted stock for the nine months ended September 30, 2012 and September 30, 2011, respectively.
- 11 -
4. INVESTMENT SECURITIES
The following tables present the available for sale investment portfolio as of September 30, 2012, and December 31, 2011:
(Dollars in thousands) | ||||||||||||
September 30, 2012 | Amortized | Unrealized | Unrealized | |||||||||
Cost | Gross Gains | Gross Losses | Fair Value | |||||||||
U.S. Treasury securities | $ | 200 | $ | - | $ | - | $ | 200 | ||||
U.S. Government agency securities | 225,728 | 4,632 | - | 230,360 | ||||||||
Corporate securities | 14,303 | - | (5,284 | ) | 9,019 | |||||||
Mortgage-backed securities | 447,437 | 13,820 | (180 | ) | 461,077 | |||||||
Obligations of state and political subdivisions | 74,948 | 5,184 | (16 | ) | 80,116 | |||||||
Equity investments and other securities | 11,240 | 657 | (12 | ) | 11,885 | |||||||
Total | $ | 773,856 | $ | 24,293 | $ | (5,492 | ) | $ | 792,657 | |||
(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 September 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 $8.5 million resulting in an estimated $5.3 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. Beginning on the 10th year anniversary of each pooled trust preferred security and quarterly thereafter, each security could, under certain circumstances, be redeemed at par. One of our trust preferred securities reached its 10 year anniversary on November 1. It is unlikely that the security will be redeemed at this point.
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 September 30, 2012 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||
U.S. Treasury securities | $ | 200 | $ | - | $ | - | $ | - | $ | 200 | $ | - | ||||||||
Corporate securities | - | - | 8,519 | (5,284 | ) | 8,519 | (5,284 | ) | ||||||||||||
Mortgage-backed securities | 24,307 | (92 | ) | 9,956 | (88 | ) | 34,263 | (180 | ) | |||||||||||
Obligations of state and political subdivisions | 2,542 | (16 | ) | - | - | 2,542 | (16 | ) | ||||||||||||
Equity and other securities | - | - | 1,188 | (12 | ) | 1,188 | (12 | ) | ||||||||||||
Total | $ | 27,049 | $ | (108 | ) | $ | 19,663 | $ | (5,384 | ) | $ | 46,712 | $ | (5,492 | ) | |||||
(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 -
4. INVESTMENT SECURITIES
Management reviews and evaluates the Companys debt securities on a quarterly basis for the presence of other-than-temporary impairment (OTTI). This 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. The Company does not intend to sell this security, and it is not likely that it will be required to sell this security, but it does 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 the Company does 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. The Company estimates 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. While this security had an impairment loss of $1.5 million at September 30, 2012, the security had no credit related OTTI as of September 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 September 30, 2012, and September 30, 2011:
September 30, 2012 | September 30, 2011 | ||||
Default Rate | 0.75 | % | 0.75 | % | |
Recovery Rate | 15.00 | % | 15.00 | % | |
Prepayments | 1.00 | % | 1.00 | % | |
Discount rate (coupon) range | 3.0%-4.3 | % | 3.75%-5.04 | % |
The following table presents information about the securities with OTTI losses for the periods shown:
(Dollars in thousands) | |||||||||||||
Three months ended | Nine months ended | ||||||||||||
September 30, 2012 | September 30, 2011 | September 30, 2012 | September 30, 2011 | ||||||||||
Other-than-temporary impairment losses on securities | $ | - | $ | - | $ | (1,726 | ) | $ | (1,636 | ) | |||
Portion of other-than temporary, non-credit related losses | |||||||||||||
recognized in other comprehensive income | - | - | 1,677 | 1,457 | |||||||||
Net other-than-temporary impairment losses on securities | $ | - | $ | - | $ | (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 | Nine months ended | ||||||||||||||
September 30, 2012 | September 30, 2011 | September 30, 2012 | September 30, 2011 | ||||||||||||
Balance of net OTTI losses on securities, beginning of period | $ | (228 | ) | $ | (179 | ) | $ | (179 | ) | $ | - | ||||
Net OTTI losses on securities in the period | - | - | (49 | ) | (179 | ) | |||||||||
Balance of net OTTI losses on securities, end of period | $ | (228 | ) | $ | (179 | ) | $ | (228 | ) | $ | (179 | ) |
At September 30, 2012, and December 31, 2011, the Company had $297.6 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 -
4. INVESTMENT SECURITIES
The following table presents the contractual maturities of the investment securities available for sale at September 30, 2012:
(Dollars in thousands) | Available for sale | ||||
September 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 | 600 | 604 | |||
After one year through five years | 160,010 | 163,732 | |||
After five through ten years | 65,118 | 66,024 | |||
Due after ten years | - | - | |||
Total | 225,728 | 230,360 | |||
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 | 8,519 | |||
Total | 14,303 | 9,019 | |||
Obligations of state and political subdivisions: | |||||
One year or less | 1,817 | 1,839 | |||
After one year through five years | 18,319 | 19,395 | |||
After five through ten years | 35,643 | 38,687 | |||
Due after ten years | 19,169 | 20,195 | |||
Total | 74,948 | 80,116 | |||
Mortgage-backed securities | 447,437 | 461,077 | |||
Equity investments and other securities | 11,240 | 11,885 | |||
Total securities | $ | 773,856 | $ | 792,657 |
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 -
5. 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) | September 30, 2012 | December 31, 2011 | |||||
Commercial | $ | 286,134 | $ | 299,766 | |||
Real estate construction | 47,406 | 30,162 | |||||
Real estate mortgage | 301,231 | 324,994 | |||||
Commercial real estate | 843,836 | 832,767 | |||||
Installment and other consumer | 12,160 | 13,612 | |||||
Total loans | 1,490,767 | 1,501,301 | |||||
Allowance for loan losses | (31,457 | ) | (35,212 | ) | |||
Total loans, net | $ | 1,459,310 | $ | 1,466,089 |
The following tables present an age analysis of the loan portfolio, including nonaccrual loans, for the periods shown:
(Dollars in thousands) | September 30, 2012 | |||||||||||||
30 - 89 days | Greater than | Total | Current | Total | ||||||||||
past due | 90 days past due | past due | loans | loans | ||||||||||
Commercial | $ | 1,075 | $ | 5,442 | $ | 6,517 | $ | 279,617 | $ | 286,134 | ||||
Real estate construction | - | 3,503 | 3,503 | 43,903 | 47,406 | |||||||||
Real estate mortgage | 2,621 | 2,657 | 5,278 | 295,953 | 301,231 | |||||||||
Commercial real estate | 2,041 | 5,593 | 7,634 | 836,202 | 843,836 | |||||||||
Installment and other consumer | 162 | 1 | 163 | 11,997 | 12,160 | |||||||||
Total | $ | 5,899 | $ | 17,196 | $ | 23,095 | $ | 1,467,672 | $ | 1,490,767 | ||||
(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 -
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following tables present an analysis of impaired loans for the periods shown:
(Dollars in thousands) | September 30, 2012 | |||||||||||||
Unpaid principal | Impaired loans | Impaired loans | Total impaired | Related | ||||||||||
balance 1 | with no allowance | with allowance | loan balance | allowance | ||||||||||
Commercial | $ | 18,478 | $ | 4,434 | $ | 2,674 | $ | 7,108 | $ | 248 | ||||
Real estate construction | 10,234 | 3,501 | 1,795 | 5,296 | 116 | |||||||||
Real estate mortgage | 25,600 | 11,641 | 2,186 | 13,827 | 106 | |||||||||
Commercial real estate | 23,445 | 13,248 | 8,685 | 21,933 | 165 | |||||||||
Installment and other consumer | 1,968 | - | 83 | 83 | 20 | |||||||||
Total | $ | 79,725 | $ | 32,824 | $ | 15,423 | $ | 48,247 | $ | 655 | ||||
(Dollars in thousands) | December 31, 2011 | |||||||||||||
Unpaid principal | Impaired loans | Impaired loans | Total impaired | Related | ||||||||||
balance 1 | with no allowance | with allowance | loan balance | allowance | ||||||||||
Commercial | $ | 18,736 | $ | 7,750 | $ | 224 | $ | 7,974 | $ | 1 | ||||
Real estate construction | 9,716 | 5,823 | 41 | 5,864 | - | |||||||||
Real estate mortgage | 30,732 | 11,949 | 6,779 | 18,728 | 329 | |||||||||
Commercial real estate | 25,426 | 15,070 | 8,604 | 23,674 | 173 | |||||||||
Installment and other consumer | 1,812 | 5 | 175 | 180 | - | |||||||||
Total | $ | 86,422 | $ | 40,597 | $ | 15,823 | $ | 56,420 | $ | 503 |
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 following table presents the average impaired loan balances and interest recognized on impaired loans for the periods shown:
(Dollars in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||||||||||
Interest | Interest | Interest | Interest | ||||||||||||||||||||
Average | Recognized | Average | Recognized | Average | Recognized | Average | Recognized | ||||||||||||||||
Impaired | on Impaired | Impaired | on Impaired | Impaired | on Impaired | Impaired | on Impaired | ||||||||||||||||
Loan Balance | Loans | Loan Balance | Loans | Loan Balance | Loans | Loan Balance | Loans | ||||||||||||||||
Commercial | $ | 6,660 | $ | 22 | $ | 10,194 | $ | 58 | $ | 6,704 | $ | 56 | $ | 11,287 | $ | 152 | |||||||
Real estate construction | 5,557 | 1 | 7,112 | 13 | 5,634 | 1 | 8,947 | 38 | |||||||||||||||
Real estate mortgage | 13,752 | 46 | 21,205 | 139 | 16,046 | 148 | 21,278 | 437 | |||||||||||||||
Commercial real estate | 21,672 | 199 | 27,273 | 142 | 22,809 | 506 | 26,225 | 392 | |||||||||||||||
Installment and other consumer | 83 | 1 | 50 | 1 | 107 | 4 | 19 | 1 | |||||||||||||||
Total | $ | 47,724 | $ | 269 | $ | 65,834 | $ | 353 | $ | 51,300 | $ | 715 | $ | 67,756 | $ | 1,020 |
- 16 -
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The balance of Troubled Debt Restructurings (TDR) at September 30, 2012, was $32.8 million, down from $37.6 million at December 31, 2011. The following table presents an analysis of TDRs recorded for the periods ended September 30, 2012, and September 30, 2011:
(Dollars in thousands) | TDRs recorded for the three months ended | TDRs recorded in the 12 months prior to September 30, 2012 that | ||||||||||||||
September 30, 2012 | subsequently defaulted in the three months ended September 30, 2012 | |||||||||||||||
Number of | Pre-TDR outstanding | Post-TDR outstanding | Number of | Pre-TDR outstanding | ||||||||||||
loans | recorded investment | recorded investment | loans | recorded investment | Amount Defaulted | |||||||||||
Commercial | 1 | $ | 22 | $ | 22 | - | $ | - | $ | - | ||||||
Real estate construction | 1 | 1,795 | 1,795 | - | - | - | ||||||||||
Real estate mortgage | - | - | - | - | - | - | ||||||||||
Commercial real estate | 3 | 855 | 855 | - | - | - | ||||||||||
Consumer loans | - | - | - | - | - | - | ||||||||||
Total | 5 | $ | 2,672 | $ | 2,672 | - | $ | - | $ | - | ||||||
(Dollars in thousands) | TDRs recorded for the three months ended | TDRs recorded in the 12 months prior to September 30, 2011 that | ||||||||||||||
September 30, 2011 | subsequently defaulted in the three months ended September 30, 2011 | |||||||||||||||
Number of | Pre-TDR outstanding | Post-TDR outstanding | Number of | Pre-TDR outstanding | ||||||||||||
loans | recorded investment | recorded investment | loans | recorded investment | Amount Defaulted | |||||||||||
Commercial | 1 | $ | 95 | $ | 95 | 2 | $ | 64 | $ | 33 | ||||||
Real estate construction | - | - | - | - | - | - | ||||||||||
Real estate mortgage | 4 | 751 | 745 | 1 | 59 | 49 | ||||||||||
Commercial real estate | 2 | 424 | 421 | 2 | 356 | 356 | ||||||||||
Consumer loans | 2 | 138 | 137 | - | - | - | ||||||||||
Total | 9 | $ | 1,408 | $ | 1,398 | 5 | $ | 479 | $ | 438 | ||||||
(Dollars in thousands) | TDRs recorded for the nine months ended | TDRs recorded in the 12 months prior to September 30, 2012 that | ||||||||||||||
September 30, 2012 | subsequently defaulted in the nine months ended September 30, 2012 | |||||||||||||||
Number of | Pre-TDR outstanding | Post-TDR outstanding | Number of | Pre-TDR outstanding | ||||||||||||
loans | recorded investment | recorded investment | loans | recorded investment | Amount Defaulted | |||||||||||
Commercial | 4 | $ | 711 | $ | 711 | - | $ | - | $ | - | ||||||
Real estate construction | 1 | 1,795 | 1,795 | - | - | - | ||||||||||
Real estate mortgage | - | - | - | - | - | - | ||||||||||
Commercial real estate | 3 | 855 | 855 | - | - | - | ||||||||||
Consumer loans | - | - | - | - | - | - | ||||||||||
Total | 8 | $ | 3,361 | $ | 3,361 | - | $ | - | $ | - | ||||||
(Dollars in thousands) | TDRs recorded for the nine months ended | TDRs recorded in the 12 months prior to September 30, 2011 that | ||||||||||||||
September 30, 2011 | subsequently defaulted in the nine months ended September 30, 2011 | |||||||||||||||
Number of | Pre-TDR outstanding | Post-TDR outstanding | Number of | Pre-TDR outstanding | ||||||||||||
loans | recorded investment | recorded investment | loans | recorded investment | Amount Defaulted | |||||||||||
Commercial | 10 | $ | 904 | $ | 874 | 2 | $ | 64 | $ | 33 | ||||||
Real estate construction | 1 | 1,008 | 744 | 1 | 983 | 983 | ||||||||||
Real estate mortgage | 9 | 2,822 | 2,803 | 1 | 59 | 49 | ||||||||||
Commercial real estate | 5 | 1,341 | 1,334 | 2 | 356 | 356 | ||||||||||
Consumer loans | 2 | 138 | 137 | - | - | - | ||||||||||
Total | 27 | $ | 6,213 | $ | 5,892 | 6 | $ | 1,462 | $ | 1,421 |
TDRs are considered impaired and are either measured based on the fair value of the collateral less selling costs or based on net present value methodology. 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 -
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table presents nonaccrual loans by category as of the dates shown:
(Dollars in thousands) | September 30, | December 31, | |||
2012 | 2011 | ||||
Commercial | $ | 6,643 | $ | 7,750 | |
Real estate construction | 3,501 |
|
5,823 | ||
Real estate mortgage | 9,015 | 11,949 | |||
Commercial real estate | 13,248 | 15,070 | |||
Installment and other consumer | - | 5 | |||
Total loans on nonaccrual status | $ | 32,407 | $ | 40,597 |
The Company uses a risk rating matrix to assign a risk rating to loans not evaluated on a homogenous pool level. At September 30, 2012, $1.12 billion of loans were risk rated and $371.7 million were evaluated on a homogeneous pool basis. Individually risk rated loans are rated on a scale of 1 to 10. A description of the general characteristics of the 10 risk ratings is as follows:
Ratings 1, 2 and 3 - These ratings include loans to very high credit quality borrowers of investment or near investment grade. These borrowers have significant capital strength, moderate leverage, stable earnings and growth, and readily available financing alternatives. Smaller entities, regardless of strength, would generally not fit in these ratings. These ratings also include loans that are collateralized by U. S. Government securities or certificates of deposits.
Rating 4 - These ratings include loans to borrowers of solid credit quality with moderate risk. Borrowers in these ratings are differentiated from higher ratings on the basis of size (capital and/or revenue), leverage, asset quality and the stability of the industry or market area.
Ratings 5 and 6 - These ratings include pass rating loans to borrowers of acceptable credit quality and risk. Such borrowers are differentiated from Rating 4 in terms of size, secondary sources of repayment or they are of lesser stature in other key credit metrics in that they may be over-leveraged, undercapitalized, inconsistent in performance or in an industry or an economic area that is known to have a higher level of risk, volatility, or susceptibility to weaknesses in the economy. However, no material adverse trends are evident with borrowers in these pass ratings.
Rating 7 - This rating includes loans on managements watch list and is intended to be utilized on a temporary basis for borrowers where a significant risk-modifying action is anticipated in the near term.
Rating 8 - This rating includes Substandard loans, in accordance with regulatory guidelines, for which the accrual of interest may or may not been discontinued. By definition under regulatory guidelines, a Substandard loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business.
Rating 9 - This rating includes Doubtful loans in accordance with regulatory guidelines. Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty.
Rating 10 - This rating includes Loss loans in accordance with regulatory guidelines. Such loans are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. Loss is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.
- 18 -
5. 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. Weighted average risk ratings percentages and classified loan totals declined in each loan category, except for installment and other consumer loans, from December 31, 2011 to September 30, 2012
(Dollars in thousands) | September 30, 2012 | December 31, 2011 | |||||||||
Weighted average | Classified | Weighted average | Classified | ||||||||
risk rating | loans | risk rating | loans | ||||||||
Commercial | 5.76 | $ | 17,617 | 5.84 | $ | 22,401 | |||||
Real estate construction | 6.51 | 11,508 | 6.99 | 13,159 | |||||||
Real estate mortgage | 6.38 | 18,504 | 6.50 | 24,004 | |||||||
Commercial real estate | 5.63 | 31,360 | 5.67 | 35,255 | |||||||
Installment and other consumer 1 | 7.89 | 238 | 7.87 | 358 | |||||||
Total | $ | 79,227 | $ | 95,177 | |||||||
Total loans risk rated | $ | 1,119,093 | $ | 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 $371.7 million at September 30, 2012, and $397.6 million at December 31, 2011.
(Dollars in thousands) | September 30, 2012 | December 31, 2011 | |||||||||||||||
Current | Nonaccrual | 30 - 89 days | Current | Nonaccrual | 30 - 89 days | ||||||||||||
status | status | past due | status | status | past due | ||||||||||||
Commercial | $ | 42,534 | $ | 19 | $ | 414 | $ | 46,774 | $ | 11 | $ | 112 | |||||
Real estate construction | - | 4 | - | - | 4 | - | |||||||||||
Real estate mortgage | 238,733 | 15 | 453 | 254,107 | 13 | 1,480 | |||||||||||
Commercial real estate | 77,367 | 155 | 86 | 81,601 | 1 | 283 | |||||||||||
Installment and other consumer | 11,733 | 1 | 163 | 13,146 | - | 56 | |||||||||||
Total | $ | 370,367 | $ | 194 | $ | 1,116 | $ | 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 September 30, 2012 | ||||||||||||||||||||||||||
Real estate | Real estate | Commercial | Installment and | ||||||||||||||||||||||||
Commercial | construction | mortgage | real estate | other consumer | Unallocated | Total | |||||||||||||||||||||
Beginning balance June 30, 2012 | $ | 6,701 | $ | 2,466 | $ | 8,642 | $ | 11,275 | $ | 931 | $ | 3,885 | $ | 33,900 | |||||||||||||
Provision for credit losses | (378 | ) | 8 | 106 | (311 | ) | 68 | (86 | ) | (593 | ) | ||||||||||||||||
Losses charged to the allowance | (203 | ) | (150 | ) | (584 | ) | (149 | ) | (230 | ) | - | (1,316 | ) | ||||||||||||||
Recoveries credited to the allowance | 101 | 6 | 110 | 23 | 57 | - | 297 | ||||||||||||||||||||
Ending balance September 30, 2012 | $ | 6,221 | $ | 2,330 | $ | 8,274 | $ | 10,838 | $ | 826 | $ | 3,799 | $ | 32,288 | |||||||||||||
Nine months ended September 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 | (1,204 | ) | (44 | ) | 1,790 | (1,407 | ) | 456 | (587 | ) | (996 | ) | |||||||||||||||
Losses charged to the allowance | (1,217 | ) | (152 | ) | (2,298 | ) | (761 | ) | (902 | ) | - | (5,330 | ) | ||||||||||||||
Recoveries credited to the allowance | 896 | 36 | 321 | 1,173 | 205 | - | 2,631 | ||||||||||||||||||||
Ending balance September 30, 2012 | $ | 6,221 | $ | 2,330 | $ | 8,274 | $ | 10,838 | $ | 826 | $ | 3,799 | $ | 32,288 | |||||||||||||
Loans valued for impairment: | |||||||||||||||||||||||||||
Individually | $ | 7,108 | $ | 5,296 | $ | 13,827 | $ | 21,933 | $ | 83 | $ | - | $ | 48,247 | |||||||||||||
Collectively | 279,026 | 42,110 | 287,404 | 821,903 | 12,077 | - | 1,442,520 | ||||||||||||||||||||
Total | $ | 286,134 | $ | 47,406 | $ | 301,231 | $ | 843,836 | $ | 12,160 | $ | - | $ | 1,490,767 |
- 19 -
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
(Dollars in thousands) | Three months ended September 30, 2011 | ||||||||||||||||||||||||||
Real estate | Real estate | Commercial | Installment and | ||||||||||||||||||||||||
Commercial | construction | mortgage | real estate | other consumer | Unallocated | Total | |||||||||||||||||||||
Beginning balance June 30, 2011 | $ | 7,858 | $ | 2,395 | $ | 8,740 | $ | 13,834 | $ | 984 | $ | 5,420 | $ | 39,231 | |||||||||||||
Provision for credit losses | 974 | 93 | 667 | (242 | ) | 372 | (732 | ) | 1,132 | ||||||||||||||||||
Losses charged to the allowance | (1,462 | ) | (567 | ) | (804 | ) | (800 | ) | (311 | ) | - | (3,944 | ) | ||||||||||||||
Recoveries credited to the allowance | 281 | 182 | 42 | 21 | 71 | - | 597 | ||||||||||||||||||||
Ending balance September 30, 2011 | $ | 7,651 | $ | 2,103 | $ | 8,645 | $ | 12,813 | $ | 1,116 | $ | 4,688 | $ | 37,016 | |||||||||||||
(Dollars in thousands) | Nine months ended September 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 | 875 | (749 | ) | 5,137 | 2,017 | 827 | (1,473 | ) | 6,634 | ||||||||||||||||||
Losses charged to the allowance | (2,683 | ) | (1,810 | ) | (4,821 | ) | (1,693 | ) | (1,211 | ) | - | (12,218 | ) | ||||||||||||||
Recoveries credited to the allowance | 918 | 188 | 173 | 27 | 227 | - | 1,533 | ||||||||||||||||||||
Ending balance September 30, 2011 | $ | 7,651 | $ | 2,103 | $ | 8,645 | $ | 12,813 | $ | 1,116 | $ | 4,688 | $ | 37,016 | |||||||||||||
Loans valued for impairment: | |||||||||||||||||||||||||||
Individually | $ | 10,144 | $ | 7,238 | $ | 21,616 | $ | 27,290 | $ | 143 | $ | - | $ | 66,431 | |||||||||||||
Collectively | 286,191 | 18,788 | 309,174 | 809,462 | 13,578 | - | 1,437,193 | ||||||||||||||||||||
Total | $ | 296,335 | $ | 26,026 | $ | 330,790 | $ | 836,752 | $ | 13,721 | $ | - | $ | 1,503,624 |
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 September 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) | September 30, 2012 | September 30, 2011 | |||
Allowance for loan losses | $ | 31,457 | $ | 36,314 | |
Reserve for unfunded commitments | 831 | 702 | |||
Total allowance for credit losses | $ | 32,288 | $ | 37,016 |
- 20 -
6. OTHER REAL ESTATE OWNED, NET
The following tables summarize Other Real Estate Owned (OREO) for the periods shown:
- 21 -
7. 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 nine months ended September 30, 2012.
The following table reconciles the numerator and denominator of the basic and diluted earnings per share computations for the periods ended September 30, 2012, and 2011:
(Dollars and shares in thousands, except per share amounts) | Three months ended | ||||
September 30, 2012 | September 30, 2011 | ||||
Net income | $ | 5,944 | $ | 6,276 | |
Less: Net income allocated to participating securities-basic: | |||||
Preferred stock | 351 | 371 | |||
Non-vested restricted stock | 53 | 87 | |||
Net income available to common stock holders-basic | 5,540 | 5,818 | |||
Add: Net income allocated per two-class method-diluted: | |||||
Stock options and Class C warrants | 19 | 18 | |||
Net income available to common stockholders-diluted | $ | 5,559 | $ | 5,836 | |
Weighted average common shares outstanding -basic | 19,110 | 19,029 | |||
Common stock equivalents from: | |||||
Stock options | 26 | 18 | |||
Class C warrants | 1,208 | 833 | |||
Weighted average common shares outstanding -diluted | 20,344 | 19,880 | |||
Basic earnings per share | $ | 0.29 | $ | 0.31 | |
Diluted earnings per share | $ | 0.27 | $ | 0.29 | |
Common stock equivalent shares excluded due to anti-dilutive effect | 144 | 233 | |||
(Dollars and shares in thousands, except per share amounts) | Nine months ended | ||||
September 30, 2012 | September 30, 2011 | ||||
Net income | $ | 17,767 | $ | 16,015 | |
Less: Net income allocated to participating securities-basic: | |||||
Preferred stock | 1,051 | 947 | |||
Non-vested restricted stock | 186 | 232 | |||
Net income available to common stock holders-basic | 16,530 | 14,836 | |||
Add: Net income allocated per two-class method-diluted: | |||||
Stock options and Class C warrants | 62 | 52 | |||
Net income available to common stockholders-diluted | $ | 16,592 | $ | 14,888 | |
Weighted average common shares outstanding -basic | 19,077 | 18,999 | |||
Common stock equivalents from: | |||||
Stock options | 24 | 21 | |||
Class C warrants | 1,124 | 931 | |||
Weighted average common shares outstanding -diluted | 20,225 | 19,951 | |||
Basic earnings per share | $ | 0.87 | $ | 0.78 | |
Diluted earnings per share | $ | 0.82 | $ | 0.75 | |
Common stock equivalent shares excluded due to anti-dilutive effect | 165 | 203 |
- 22 -
8. 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) | September 30, 2012 | December 31, 2011 | |||
Financial instruments whose contract amounts represent credit risk: | |||||
Commitments to extend credit in the form of loans | |||||
Commercial | $ | 253,955 | $ | 251,105 | |
Real estate construction | 36,178 | 23,932 | |||
Real estate mortgage | |||||
Mortgage | 3,400 | 3,419 | |||
Home equity loans and lines of credit | 138,980 | 150,196 | |||
Total real estate mortgage loans | 142,380 | 153,615 | |||
Commercial real estate | 9,829 | 10,993 | |||
Installment and consumer | 9,569 | 9,907 | |||
Other | 23,952 | 12,803 | |||
Standby letters of credit and financial guarantees | 8,278 | 8,349 | |||
Account overdraft protection instruments | 77,214 | 103,642 | |||
Total | $ | 561,355 | $ | 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, Bancorp does 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 -
9. 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 September 30, 2012 | ||||||||||||||
Banking | Other | Intersegment | Consolidated | ||||||||||||
Interest income | $ | 22,718 | $ | 8 | $ | - | $ | 22,726 | |||||||
Interest expense | 736 | 303 | - | 1,039 | |||||||||||
Net interest income (expense) | 21,982 | (295 | ) | - | 21,687 | ||||||||||
Provision for credit losses | (593 | ) | - | - | (593 | ) | |||||||||
Noninterest income | 7,697 | 742 | (267 | ) | 8,172 | ||||||||||
Noninterest expense | 20,657 | 917 | (267 | ) | 21,307 | ||||||||||
Income (loss) before income taxes | 9,615 | (470 | ) | - | 9,145 | ||||||||||
Provision (benefit) for income taxes | 3,384 | (183 | ) | - | 3,201 | ||||||||||
Net income (loss) | $ | 6,231 | $ | (287 | ) | $ | - | $ | 5,944 | ||||||
Depreciation and amortization | $ | 2,182 | $ | 7 | $ | - | $ | 2,189 | |||||||
Assets | $ | 2,470,331 | $ | 15,001 | $ | (9,352 | ) | $ | 2,475,980 | ||||||
Loans, net | $ | 1,459,310 | $ | - | $ | - | $ | 1,459,310 | |||||||
Deposits | $ | 1,938,644 | $ | - | $ | (9,352 | ) | $ | 1,929,292 | ||||||
Equity | $ | 374,769 | $ | (38,773 | ) | $ | - | $ | 335,996 |
(Dollars in thousands) | Three months ended September 30, 2011 | ||||||||||||||
Banking | Other | Intersegment | Consolidated | ||||||||||||
Interest income | $ | 24,711 | $ | 10 | $ | - | $ | 24,721 | |||||||
Interest expense | 5,104 | 276 | - | 5,380 | |||||||||||
Net interest income (expense) | 19,607 | (266 | ) | - | 19,341 | ||||||||||
Provision for credit losses | 1,132 | - | - | 1,132 | |||||||||||
Noninterest income | 7,931 | 754 | (271 | ) | 8,414 | ||||||||||
Noninterest expense | 21,982 | 909 | (271 | ) | 22,620 | ||||||||||
Income (loss) before income taxes | 4,424 | (421 | ) | - | 4,003 | ||||||||||
Provision (benefit) for income taxes | (2,109 | ) | (164 | ) | - | (2,273 | ) | ||||||||
Net income (loss) | $ | 6,533 | $ | (257 | ) | $ | - | $ | 6,276 | ||||||
Depreciation and amortization | $ | 2,349 | $ | 8 | $ | - | $ | 2,357 | |||||||
Assets | $ | 2,516,335 | $ | 15,227 | $ | (10,315 | ) | $ | 2,521,247 | ||||||
Loans, net | $ | 1,467,310 | $ | - | $ | - | $ | 1,467,310 | |||||||
Deposits | $ | 2,000,518 | $ | - | $ | (9,740 | ) | $ | 1,990,778 | ||||||
Equity | $ | 334,746 | $ | (37,879 | ) | $ | - | $ | 296,867 |
- 24 -
9. SEGMENT AND RELATED INFORMATION
(Dollars in thousands) | Nine months ended September 30, 2012 | ||||||||||||||
Banking | Other | Intersegment | Consolidated | ||||||||||||
Interest income | $ | 68,875 | $ | 25 | $ | - | $ | 68,900 | |||||||
Interest expense | 2,393 | 914 | - | 3,307 | |||||||||||
Net interest income (expense) | 66,482 | (889 | ) | - | 65,593 | ||||||||||
Provision for credit losses | (996 | ) | - | - | (996 | ) | |||||||||
Noninterest income | 23,068 | 2,287 | (802 | ) | 24,553 | ||||||||||
Noninterest expense | 61,840 | 2,770 | (802 | ) | 63,808 | ||||||||||
Income (loss) before income taxes | 28,706 | (1,372 | ) | - | 27,334 | ||||||||||
Provision (benefit) for income taxes | 10,102 | (535 | ) | - | 9,567 | ||||||||||
Net income (loss) | $ | 18,604 | $ | (837 | ) | $ | - | $ | 17,767 | ||||||
Depreciation and amortization | $ | 6,397 | $ | 21 | $ | - | $ | 6,418 | |||||||
Assets | $ | 2,470,331 | $ | 15,001 | $ | (9,352 | ) | $ | 2,475,980 | ||||||
Loans, net | $ | 1,459,310 | $ | - | $ | - | $ | 1,459,310 | |||||||
Deposits | $ | 1,938,644 | $ | - | $ | (9,352 | ) | $ | 1,929,292 | ||||||
Equity | $ | 374,769 | $ | (38,773 | ) | $ | - | $ | 335,996 | ||||||
(Dollars in thousands) | Nine months ended September 30, 2011 | ||||||||||||||
Banking | Other | Intersegment | Consolidated | ||||||||||||
Interest income | $ | 74,710 | $ | 33 | $ | - | $ | 74,743 | |||||||
Interest expense | 11,044 | 885 | - | 11,929 | |||||||||||
Net interest income (expense) | 63,666 | (852 | ) | - | 62,814 | ||||||||||
Provision for credit losses | 6,634 | - | - | 6,634 | |||||||||||
Noninterest income | 23,843 | 2,369 | (812 | ) | 25,400 | ||||||||||
Noninterest expense | 66,162 | 2,781 | (812 | ) | 68,131 | ||||||||||
Income (loss) before income taxes | 14,713 | (1,264 | ) | - | 13,449 | ||||||||||
Provision (benefit) for income taxes | (2,073 | ) | (493 | ) | - | (2,566 | ) | ||||||||
Net income (loss) | $ | 16,786 | $ | (771 | ) | $ | - | $ | 16,015 | ||||||
Depreciation and amortization | $ | 6,367 | $ | 22 | $ | - | $ | 6,389 | |||||||
Assets | $ | 2,516,335 | $ | 15,227 | $ | (10,315 | ) | $ | 2,521,247 | ||||||
Loans, net | $ | 1,467,310 | $ | - | $ | - | $ | 1,467,310 | |||||||
Deposits | $ | 2,000,518 | $ | - | $ | (9,740 | ) | $ | 1,990,778 | ||||||
Equity | $ | 334,746 | $ | (37,879 | ) | $ | - | $ | 296,867 |
- 25 -
10. 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 September 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 | $ | 101,335 | $ | 101,335 | $ | 101,335 | $ | - | $ | - | ||||
Trading securities | 853 | 853 | 853 | - | - | |||||||||
Investment securities | 792,657 | 792,657 | 1,990 | 781,648 | 9,019 | |||||||||
Federal Home Loan Bank stock | 12,040 | 12,040 | - | 12,040 | - | |||||||||
Loans held for sale | - | - | - | - | - | |||||||||
Net loans (net of allowance for loan losses) | 1,459,310 | 1,391,543 | - | - | 1,391,543 | |||||||||
Bank owned life insurance | 26,895 | 26,895 | - | 26,895 | - | |||||||||
FINANCIAL LIABILITIES: | ||||||||||||||
Deposits | $ | 1,929,292 | $ | 1,929,366 | $ | - | $ | 1,929,366 | $ | - | ||||
Short-term borrowings | 35,000 | 35,000 | - | 35,000 | - | |||||||||
Long-term borrowings | 92,900 | 93,517 | - | 93,517 | - | |||||||||
Junior subordinated debentures-variable | 51,000 | 27,390 | - | 27,390 | - |
- 26 -
10. 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 September 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.
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10. 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 the Companys 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 reviews OREO at least annually 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.
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10. 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 September 30, 2012, loans amounting to $48.2 million in Bancorps loan portfolio were deemed impaired. In addition, during the third quarter, certain OREO properties were written down by a total of $.5 million to reflect additional decreases in estimated fair market value subsequent to the time such properties were placed into OREO.
Fair value measurements at September 30, 2012, using | ||||||||||||||
Quoted prices in active | ||||||||||||||
markets for identical | Other observable | Significant | ||||||||||||
(Dollars in thousands) | Fair Value | assets | inputs | unobservable inputs | Impairment | |||||||||
September 30, 2012 | (Level 1) | (Level 2) | (Level 3) | recognized | ||||||||||
Recurring fair value measurements: | ||||||||||||||
Trading securities | $ | 853 | $ | 853 | $ | - | $ | - | ||||||
Available for sale securities: | ||||||||||||||
U.S. Treasury securities | 200 | - | 200 | - | ||||||||||
U.S. Government agency securities | 230,360 | - | 230,360 | - | ||||||||||
Corporate securities | 9,019 | - | - | 9,019 | ||||||||||
Mortgage-backed securities | 461,077 | - | 461,077 | - | ||||||||||
Obligations of state and political subdivisions | 80,116 | - | 80,116 | - | ||||||||||
Equity investments and other securities | 11,885 | 1,990 | 9,895 | - | ||||||||||
Total recurring assets measured at fair value | $ | 793,510 | $ | 2,843 | $ | 781,648 | $ | 9,019 | ||||||
Nonrecurring fair value measurements | ||||||||||||||
for the three months ending: | ||||||||||||||
Loans measured for impairment 1 | $ | 3,972 | $ | - | $ | - | $ | 3,972 | $ | 1,316 | ||||
OREO 1 | 4,231 | - | - | 4,231 | 486 | |||||||||
Total nonrecurring fair value measurements | $ | 8,203 | $ | - | $ | - | $ | 8,203 | $ | 1,802 | ||||
Nonrecurring fair value measurements | ||||||||||||||
for the nine months ending: | ||||||||||||||
Loans measured for impairment 1 | $ | 15,901 | $ | - | $ | - | $ | 15,901 | $ | 5,330 | ||||
OREO 1 | 31,345 | - | - | 31,345 | 2,220 | |||||||||
Total nonrecurring fair value measurements | $ | 47,246 | $ | - | $ | - | $ | 47,246 | $ | 7,550 |
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.
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10. 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 | ||||||||||||
(Dollars in thousands) | Fair Value | assets | inputs | unobservable inputs | Impairment | |||||||||
December 31, 2011 | (Level 1) | (Level 2) | (Level 3) | recognized | ||||||||||
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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10. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company made no transfers between hierarchy levels in the third 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 September 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 nine months ended September 30, 2012, and 2011:
Three months ended September 30, 2012 | ||||||||||||||||
Reclassification of | ||||||||||||||||
Gains (losses) | losses from | |||||||||||||||
included in other | adjustment for | Purchases, | ||||||||||||||
Balance | comprehensive | impairment of | Issuances, and | Balance | ||||||||||||
(Dollars in thousands) | June 30, 2012 | income | securities | Settlements | September 30, 2012 | |||||||||||
Corporate securities | $ | 8,378 | $ | 641 | $ | - | $ | - | $ | 9,019 | ||||||
Fair value | $ | 8,378 | $ | 641 | $ | - | $ | - | $ | 9,019 | ||||||
Nine months ended September 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 | September 30, 2012 | |||||||||||
Corporate securities | $ | 8,507 | $ | 463 | $ | 49 | $ | - | $ | 9,019 | ||||||
Fair value | $ | 8,507 | $ | 463 | $ | 49 | $ | - | $ | 9,019 | ||||||
Three months ended September 30, 2011 | ||||||||||||||||
Reclassification of | ||||||||||||||||
Gains (losses) | losses from | |||||||||||||||
included in other | adjustment for | Purchases, | ||||||||||||||
Balance | comprehensive | impairment of | Issuances, and | Balance | ||||||||||||
(Dollars in thousands) | June 30, 2011 | income | securities | Settlements | September 30, 2011 | |||||||||||
Corporate securities | $ | 9,506 | $ | (648 | ) | $ | - | $ | - | $ | 8,858 | |||||
Obligations of state and political subdivisions | 804 | (309 | ) | - | - | 495 | ||||||||||
Fair value | $ | 10,310 | $ | (957 | ) | $ | - | $ | - | $ | 9,353 | |||||
Nine months ended September 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 | September 30, 2011 | |||||||||||
Corporate securities | $ | 9,392 | $ | (713 | ) | $ | 179 | $ | - | $ | 8,858 | |||||
Obligations of state and political subdivisions | 957 | (462 | ) | - | - | 495 | ||||||||||
Fair value | $ | 10,349 | $ | (1,175 | ) | $ | 179 | $ | - | $ | 9,353 |
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10. 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 September 30, 2012:
(Dollars in thousands)
September 30, 2012 | Valuation | Unobservable | Weighted | |||||||||
Fair Value | technique | inputs | Range | average | ||||||||
Corporate securities | $ | 9,019 | 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 | 6.90 - 8.10% | 7.40 | % | |||||||||
Loans measured for impairment | 3,972 | Market comparable | Adjustment to appraisal value | .84 - 72.02% | 9.88 | % | ||||||
OREO | 4,231 | Market comparable | Adjustment to appraisal value | 0 - 78.37% | 11.18 | % |
The following table presents quantitative information about Level 3 fair value measurements for the nine months ended September 30, 2012:
(Dollars in thousands)
September 30, 2012 | Valuation | Unobservable | Weighted | |||||||||
Fair Value | technique | inputs | Range | average | ||||||||
Corporate securities | $ | 9,019 | 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 | 7.10 - 8.40% | 7.90 | % | |||||||||
Loans measured for impairment | 3,507 | Income approach | Capitalization rate | 6.75 - 8.00% | 7.27 | % | ||||||
12,394 | Market comparable | Adjustment to appraisal value | .25 - 72.02% | 10.60 | % | |||||||
OREO | 6,248 | Income approach | Capitalization rate | 6.75 - 8.50% | 7.69 | % | ||||||
25,097 | Market comparable | Adjustment to appraisal value | 0 - 78.37% | 8.37 | % |
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 the Companys corporate securities are highly sensitive to its estimate of the cash flow from these securities. Higher default or deferral rates and lower recovery rates reduce the overall estimated cash flows and would reduce the estimated fair value of these securities. Prepayment assumptions, recovery lag assumptions and discount rates have a reduced relative effect on the fair value estimates.
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Item 2. 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 Bancorp, including information included or incorporated by reference herein, 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. These forward-looking statements include, but are not limited to, (i) statements about the benefits of the Merger (as defined below), including future financial and operating results, cost savings, enhancements to revenue and accretion to reported earnings that may be realized from the Merger; and (ii) statements about Columbia Banking System, Inc.s (Columbia) and Bancorps respective plans, objectives, expectations and intentions and other statements that are not historical facts. The Companys actual results could be quite different from those expressed or implied by the forward-looking statements. Words such as could, intends, 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. These forward-looking statements are based on current beliefs and expectations of Columbias and Bancorps managements, and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond Columbias and Bancorps control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Factors that could cause events, results or performance to differ from those expressed or implied by the 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:
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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 the Companys forward-looking statements, which reflect managements analysis only as of the date of the statements. The Company does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report.
Community Reinvestment Act (CRA)
The Bank received a CRA rating of satisfactory during its most recent CRA examination in September 2010.
Agreement and Plan of Merger
On September 25, 2012, Bancorp entered into an Agreement and Plan of Merger (the Merger Agreement) with Columbia, pursuant to which a newly formed subsidiary of Columbia will merge with and into Bancorp (the Merger), with Bancorp continuing as the surviving corporation (the Surviving Corporation). As soon as reasonably practicable following the Merger, and as part of a single integrated transaction, the Surviving Corporation will be merged with and into Columbia (the Second Step Merger and together with the Merger, the Mergers).
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, Bancorp shareholders will have the right, with respect to each of their shares of Bancorp common stock, to elect to receive, subject to proration and adjustment, either cash, stock, or a unit consisting of a mix of cash and stock in an amount equal to their pro rata share (taking into account Class C Warrants and in-the-money stock options on an as-exercised basis and shares of common stock issuable upon conversion of Series B Preferred Stock (including shares of Series B Preferred Stock issuable upon exercise of Class C Warrants)) of the total consideration, which consists of $264,468,650 in cash (subject to adjustment in certain circumstances), plus the product of 12,809,525 shares of Columbia common stock multiplied by the volume weighted average price of Columbia common stock for the twenty trading day period beginning on the twenty fifth day before the effective time of the Merger.
The Merger Agreement contains customary representations and warranties from both Bancorp and Columbia. Bancorp has also agreed to various customary covenants and agreements, including, among others, (1) to conduct its business in the ordinary course consistent with past practice in all material respects during the interim period between the execution of the Merger Agreement and the consummation of the Merger, (2) not to engage in certain kinds of transactions or take certain actions during this period without the prior written consent of Columbia (which may not be unreasonably withheld), (3) subject to certain exceptions, to convene and hold a meeting of its shareholders to consider and vote upon the Merger Agreement, (4) to recommend approval of the Merger Agreement to its shareholders and, subject to certain exceptions, not to withdraw or materially and adversely modify such recommendation, (5) not to initiate, solicit, encourage or knowingly facilitate any alternative proposal to acquire Bancorp, and (6) subject to certain exceptions, not to provide any non-public information in connection with any such alternative proposal, or engage in any discussions relating to any such proposal. Columbia has also agreed to various customary covenants and agreements.
The consummation of the Merger is subject to customary conditions, including, among others, (1) approval by Bancorp shareholders of the Merger Agreement, (2) approval by Columbia shareholders of the issuance of Columbia common stock in connection with the Merger, (3) effectiveness of the registration statement on Form S-4 for the Columbia common stock to be issued in the Merger, (4) authorization for listing on the Nasdaq Stock Exchange of the shares of Columbia common stock to be issued in the Merger, (5) the absence of any law, order, injunction or decree prohibiting or making illegal the closing of the Merger or the other transactions contemplated by the Merger Agreement and (6) receipt of required regulatory approvals. Each partys obligation to consummate the Merger is also subject to certain additional customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations and (iii) the receipt by such party of an opinion from its counsel to the effect that the Mergers, taken together, will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
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The Merger Agreement contains certain termination rights in favor of each of Columbia and Bancorp. Upon termination of the Merger Agreement under certain circumstances, Bancorp will be obligated to pay Columbia a termination fee of $20 million. Upon termination of the Merger Agreement in certain other limited circumstances, Columbia will be obligated to pay Bancorp a termination fee of $5 million.
Certain terms of the Merger Agreement and other related agreements are summarized in, and the Merger Agreement has been filed as an exhibit to, the Current Report on Form 8-K filed by Bancorp with the Securities and Exchange Commission on October 1, 2012.
Current Regulatory Matters
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 paying interest on its $51 million in trust preferred securities outstanding. At this time, the Reserve Bank requires that we continue to inform and consult with them and seek a non-objection notice ahead of declaring and paying cash dividends to shareholders. Bancorp received such non-objection notice in conjunction with the $.05 per share shareholder cash dividend declared by its Board of Directors on September 25, 2012, which is payable on October 31, 2012.
West Coast Bank continues to be subject to a Memorandum of Understanding (MOU) with the Federal Deposit Insurance Corporation (FDIC) and DFCS, which requires that during the life of the MOU the Bank may not pay dividends without the written consent of the FDIC and DFCS and that the Bank maintain higher levels of capital than required by published capital adequacy requirements. For additional discussion of the MOU, see Item 1, Business Current Regulatory Actions in the Companys 2011 10-K.
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Third Quarter 2012 Financial Overview
On September 25, 2012, the Companys Board of Directors declared a cash dividend of $.05 per share common share and $.50 per share of Series B Preferred Stock payable on October 31, 2012, to shareholders of record on October 10, 2012. Amounts payable to holders of Series B Preferred Stock are equal to amounts that would have been received if such Series B preferred stock had been converted to common stock prior to payment of the dividend. The declaration of the dividend reflected the Companys strong capital position and continued profitability. Key financial measures included:
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 nine months ended September 30, 2012 and 2011
Net Income. Net income for the three months ended September 30, 2012, was $5.9 million, as compared to net income of $6.3 for the three months ended September 30, 2011. Earnings per diluted share for the three months ended September 30, 2012, was $0.27, as compared to earnings per diluted share of $0.29 for the three months ended September 30, 2011.
Net income for the first nine months of 2012 was $17.8 million or $.82 per diluted share compared to net income of $16.0 million or $.75 per diluted share in the same period of 2011.
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The table below shows the reconciliation of net income to the non-generally accepted accounting principles in the United States of America (GAAP) financial measures presented in this report including both net income excluding after-tax merger-related expenses and noninterest expense excluding merger-related expenses, to the corresponding figures, net income and noninterest expense, calculated in accordance with U.S. GAAP for the quarters ended September 30, 2012, and 2011, and the nine months ended as of September 30, 2012, and 2011. Management uses this non-GAAP information internally and has disclosed it to investors based on its belief that the information provides additional, valuable information relating to its operating performance as compared to prior periods.
Certain ratios in this report, such as efficiency ratio and return on average assets excluding merger related expenses, are calculated using these non-GAAP measures.
Three months ended | Nine months ended | ||||||||||||||||||
(Dollars in thousands) | September 30, | Change | September 30, | Change | |||||||||||||||
2012 | 2011 | $ | 2012 | 2011 | $ | ||||||||||||||
Net income | $ | 5,944 | $ | 6,276 | $ | (332 | ) | $ | 17,767 | $ | 16,015 | $ | 1,752 | ||||||
Merger-related expenses | 578 | - | 578 | 578 | - | 578 | |||||||||||||
Less: tax benefit from merger-related expenses (1) | 202 | - | 202 | 202 | - | 202 | |||||||||||||
After-tax merger-related expenses | 376 | - | 376 | 376 | - | 376 | |||||||||||||
Net income excluding after-tax merger-related expenses (2,3) | $ | 6,320 | $ | 6,276 | $ | 44 | $ | 18,143 | $ | 16,015 | $ | 2,128 | |||||||
Noninterest expense | $ | 21,307 | $ | 22,620 | $ | (1,313 | ) | $ | 63,808 | $ | 68,131 | $ | (4,323 | ) | |||||
Merger-related expenses | 578 | - | 578 | 578 | - | 578 | |||||||||||||
Noninterest expense excluding merger-related expenses (3,4) | $ | 20,729 | $ | 22,620 | $ | (1,891 | ) | $ | 63,230 | $ | 68,131 | $ | (4,901 | ) |
(1) Tax rate assumed to be 35%. |
(2) Net income excluding merger-related expenses is GAAP net income adjusted for the after-tax impact of merger-related expenses. |
(3) Management uses this non-GAAP information internally and has disclosed it to investors based on its belief that the information provides additional, valuable information relating to the Company's operating performance as compared to prior periods. |
(4) Noninterest expense excluding merger-related expenses is used to calculate the efficiency ratio excluding merger-related expenses. |
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Net Interest Income. The following table sets forth, for the periods indicated, information with regard to (1) average balances of assets and liabilities, (2) the total dollar amounts of interest income on interest earning assets and interest expense on interest bearing liabilities, (3) resulting yields and rates, (4) net interest income and (5) net interest spread. Nonaccrual loans have been included in the tables as loans carrying a zero yield. Loan fees are recognized as income using the interest method over the life of the loan.
1 | Yield/rate calculations have been based on more detailed information and therefore may not recompute exactly due to rounding. |
2 | Interest earned on nontaxable securities has been computed on a 35% tax equivalent basis. |
3 | Includes balances of loans held for sale and nonaccrual loans. |
4 | Includes portion of $2.8 million prepayment fee in connection with the $88.3 million prepayment in FHLB borrowings in the third quarter of 2011. |
5 | Includes junior subordinated debentures with average balance of $51.0 million for the three months ended September 30, 2012, and 2011, and June 30, 2012. |
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Third quarter 2012 net interest income of $21.7 million increased $2.3 million from the same quarter in 2011 due to a prepayment charge of $2.8 million in the third quarter of 2011 associated with the prepayment of $88.3 million in term Federal Home Loan Bank of Seattle (FHLB) borrowings. The current quarter also reflects the benefit from the prepayment in the second half of 2011 of a total of $168.6 million term FHLB borrowings, with an average interest rate of 3.17%, which were partially replaced by $120.0 million in new FHLB borrowings at an average interest rate of 1.05%. Net interest income on a tax equivalent basis was $22.0 million in the most recent quarter, up from $19.6 million in the third quarter of 2011. Third quarter 2012 average interest earning assets of $2.30 billion decreased $47.6 million, or 2.0%, from $2.35 billion in the same period in 2011. Average interest bearing liabilities of $1.41 billion declined $147.4 million or 9.5%, from $1.56 billion over the same period, while average noninterest bearing demand deposits increased $61.7 million or 10.0% over the same period.
The third quarter 2012 net interest margin of 3.80% increased 49 basis points from third quarter 2011, principally due to the impact of the FHLB prepayment in the third quarter last year and lower volume and cost of interest-bearing liabilities more than offsetting the effect of a year-over-year decline in average loan balances and lower yields on loan and investment portfolios.
Net interest income for the nine months ended September 30, 2012, was $65.6 million, an increase of $2.8 million compared to the same period in 2011. For the nine months ended September 30, 2012, net interest margin was 3.92%, an increase of 27 basis points from 3.65% for the nine months ended September 30, 2011. The increase in net interest income and margin for the nine month period was substantially due to the same factors as for the increase in year-over-year third quarter net interest income and margin.
As of September 30, 2012, the Bank had $771.5 million in floating and adjustable rate loans with interest rate floors, with $605.6 million of these loans at their floor rate. At September 30, 2011, the Bank had $708.3 million in floating and adjustable rate loans with interest rate floors, with $520.3 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, however, 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 September 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 shocks. Management believes its 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, actions of competitors and customers in response to those changes. Whether interest rate parallel rate shocks or gradual interest rate changes are utilized in modeling, will also affect its estimates of its interest rate risk position. For more information see the discussion under the heading Quantitative and Qualitative Disclosures about Market Risk in the Companys 2011 10-K.
Provision for Credit Losses. Bancorp recorded a benefit for credit losses for the third quarter of 2012 of $.6 million compared to a provision for credit losses of $1.1 million in the third quarter of 2011. The benefit for credit losses in third quarter 2012 reflects an overall improved risk profile of the loan portfolio evidenced by modest charge-off activity, low delinquency, and a positive risk rating migration. The benefit for credit losses was $1.0 million for the nine months ended September 30, 2012, compared to a provision for credit losses of $6.6 million in the same period of 2011. The reduction in 2012 year-to-date net charge-offs compared to the same period in 2011 was heavily influenced by a recovery of $1.1 million related to a commercial real estate loan in the second quarter of 2012.
The provision for credit losses in future periods will depend primarily on economic conditions and the interest rate environment, as weakening economic conditions or an increase in interest rates could put pressure on the ability of the Banks 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 $8.2 million for the quarter ended September 30, 2012, decreased $.2 million from $8.4 million in the third quarter of 2011. The decline can be attributed to a $.7 million decrease in gains on sales of Other Real Estate Owned (OREO) and slightly lower service charges on deposit accounts and payment systems-related revenues. These declines were partly offset by a $.3 million increase in gains on sales of loans, an increase in trust and investment services revenues, and lower OREO valuation adjustments. Total net loss on OREO was $.5 million in the quarter ended September 30, 2012, as compared to virtually no net loss in the same quarter of 2011. Total noninterest income decreased 4% or $.3 million from the second quarter of 2012, as a lower total net loss on OREO did not offset declines in remaining noninterest income categories. The Company recognized $.4 million less in gains on sales of Small Business Administration loans in the third quarter of 2012 compared to the prior quarter and realized and no gains on sales of securities in the most recent quarter.
Noninterest income for the nine months ended September 30, 2012, was $24.6 million, a decline of $.8 million from $25.4 million in the same period in 2011. The year-to-date decrease in noninterest income was primarily due to a $1.3 million decrease in service charges on deposit accounts and a $.7 million decrease in OREO gains on sale partly offset by an increase of $.9 million in gains on sales of loans.
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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) | September 30, | Change | June 30, | Change | ||||||||||||||||||||||
2012 | 2011 | $ | % | 2012 | $ | % | ||||||||||||||||||||
Noninterest income | ||||||||||||||||||||||||||
Service charges on deposit accounts | $ | 3,017 | $ | 3,129 | $ | (112 | ) | -4 | % | $ | 3,212 | $ | (195 | ) | -6 | % | ||||||||||
Payment systems related revenue | 3,073 | 3,201 | (128 | ) | -4 | % | 3,084 | (11 | ) | - | ||||||||||||||||
Trust and investment services revenues | 1,231 | 1,033 | 198 | 19 | % | 1,457 | (226 | ) | -16 | % | ||||||||||||||||
Gains on sales of loans | 492 | 222 | 270 | 122 | % | 722 | (230 | ) | -32 | % | ||||||||||||||||
Gains (losses) on sales of securities | - | 124 | (124 | ) | -100 | % | 228 | (228 | ) | -100 | % | |||||||||||||||
Other-than-temporary impairment losses | - | - | - | - | - | - | - | |||||||||||||||||||
Other | 816 | 716 | 100 | 14 | % | 821 | (5 | ) | -1 | % | ||||||||||||||||
Total | 8,629 | 8,425 | 204 | 2 | % | 9,524 | (895 | ) | -9 | % | ||||||||||||||||
OREO gains (losses) on sale | 29 | 685 | (656 | ) | -96 | % | 183 | (154 | ) | 84 | % | |||||||||||||||
OREO valuation adjustments | (486 | ) | (696 | ) | 210 | 30 | % | (1,213 | ) | 727 | 60 | % | ||||||||||||||
Total | (457 | ) | (11 | ) | (446 | ) | -4055 | % | (1,030 | ) | 573 | 56 | % | |||||||||||||
Total noninterest income | $ | 8,172 | $ | 8,414 | $ | (242 | ) | -3 | % | $ | 8,494 | $ | (322 | ) | -4 | % |
Noninterest Expense. Noninterest expense for the three months ended September 30, 2012, of $21.3 million, declined $1.3 million or 6% from $22.6 million in third quarter 2011. Excluding expenses associated with the previously announced plan of Merger with Columbia, total noninterest expense declined $1.9 million or 8% over the same period. Principally as a result of cost savings initiatives implemented over the past year, expenses declined in nearly all categories from the corresponding quarter in 2011. Noninterest expenses also declined across most categories on a linked quarter basis.
Noninterest expense for the nine months ended September 30, 2012, was $63.8 million, a decrease of $4.3 million or 6.3% from $68.1 million for the nine months ended September 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 70.4% in the nine months ended September 30, 2012, from 77.0% 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) | September 30, | September 30, | Change | June 30, | Change | ||||||||||||||||||
2012 | 2011 | $ | % | 2012 | $ | % | |||||||||||||||||
Noninterest expense | |||||||||||||||||||||||
Salaries and employee benefits | $ | 11,499 | $ | 11,977 | $ | (478 | ) | -4 | % | $ | 12,081 | $ | (582 | ) | -5 | % | |||||||
Equipment | 1,480 | 1,461 | 19 | 1 | % | 1,584 | (104 | ) | -7 | % | |||||||||||||
Occupancy | 1,901 | 2,115 | (214 | ) | -10 | % | 2,119 | (218 | ) | -10 | % | ||||||||||||
Payment systems related expense | 1,148 | 1,279 | (131 | ) | -10 | % | 1,075 | 73 | 7 | % | |||||||||||||
Professional fees | 777 | 1,038 | (261 | ) | -25 | % | 1,060 | (283 | ) | -27 | % | ||||||||||||
Postage, printing and office supplies | 735 | 772 | (37 | ) | -5 | % | 729 | 6 | 1 | % | |||||||||||||
Marketing | 520 | 862 | (342 | ) | -40 | % | 255 | 265 | 104 | % | |||||||||||||
Communications | 411 | 387 | 24 | 6 | % | 419 | (8 | ) | -2 | % | |||||||||||||
Other noninterest expense | 2,258 | 2,729 | (471 | ) | -17 | % | 2,154 | 104 | 5 | % | |||||||||||||
Total noninterest expense excluding merger expenses | $ | 20,729 | $ | 22,620 | $ | (1,891 | ) | -8 | % | $ | 21,476 | $ | (747 | ) | -3 | % | |||||||
Merger expense | 578 | - | 578 | 0 | % | - | 578 | 0 | % | ||||||||||||||
Total noninterest expense | $ | 21,307 | $ | 22,620 | $ | (1,313 | ) | -6 | % | $ | 21,476 | $ | (169 | ) | -1 | % |
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 the Companys ability to control its expenses in the future.
Income Taxes . The Company recorded an income tax provision for the three months ended September 30, 2012, of $3.2 million compared to a $2.3 million benefit during the third quarter of 2011. For the nine months period ended September 30, 2012, the Company recorded an income tax provision of $9.6 million compared to an income tax benefit of $2.6 million in the first nine months of 2011. The three and nine month period ended September 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 nine month period ended September 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:
The Companys balance sheet management efforts are focused on increasing loan balances with new loan production within established concentration parameters to targeted customer segments as opportunities arise, limiting loan concentrations within our loan portfolio, maintaining a strong capital position until the Company have more certainty regarding prospective economic conditions, and retaining sufficient liquidity. While new loan commitment production year-to-date has increased from the same period in 2011, loan growth remains challenging due to loan prepayments, modest draws on lines of credit, and a continued to decline in our sizeable home equity portfolio. The Company also expects to further reduce nonperforming assets by resolving nonaccrual loans and disposing of OREO properties.
Cash and Cash Equivalents
Total cash and cash equivalents at September 30, 2012, of $101.3 million, increased from December 31, 2011 due to higher interest bearing deposits held in other banks, and decreased slightly from September 30, 2011.
(Dollars in thousands) | September 30, | % of | December 31, | % of | Change | September 30, | % of | ||||||||||||||||||
2012 | total | 2011 | total | Amount | % | 2011 | total | ||||||||||||||||||
Cash and cash equivalents: | |||||||||||||||||||||||||
Cash and due from banks | $ | 53,026 | 52 | % | $ | 59,955 | 65 | % | $ | (6,929 | ) | -12 | % | $ | 57,442 | 54 | % | ||||||||
Federal funds sold | 3,426 | 4 | % | 4,758 | 5 | % | (1,332 | ) | -28 | % | 2,102 | 2 | % | ||||||||||||
Interest-bearing deposits in other banks | 44,883 | 44 | % | 27,514 | 30 | % | 17,369 | 63 | % | 47,734 | 44 | % | |||||||||||||
Total cash and cash equivalents | $ | 101,335 | 100 | % | $ | 92,227 | 100 | % | $ | 9,108 | 10 | % | 107,278 | 100 | % |
Investment Portfolio
The compositions and carrying values of Bancorps investment securities portfolio were as follows:
September 30, 2012 | December 31, 2011 | September 30, 2011 | ||||||||||||||||||||||||||||
Net | Net | Net | ||||||||||||||||||||||||||||
Amortized | Unrealized | Amortized | Unrealized | Amortized | Unrealized | |||||||||||||||||||||||||
(Dollars in thousands) | Cost | Fair Value | Gain/(Loss) | Cost | Fair Value | Gain/(Loss) | Cost | Fair Value | Gain/(Loss) | |||||||||||||||||||||
U.S. Treasury securities | $ | 200 | $ | 200 | $ | - | $ | 200 | $ | 203 | $ | 3 | $ | 200 | $ | 205 | $ | 5 | ||||||||||||
U.S. Government agency securities | 225,728 | 230,360 | 4,632 | 216,211 | 219,631 | 3,420 | 274,282 | 277,669 | 3,387 | |||||||||||||||||||||
Corporate securities | 14,303 | 9,019 | (5,284 | ) | 14,351 | 8,507 | (5,844 | ) | 14,352 | 8,858 | (5,494 | ) | ||||||||||||||||||
Mortgage-backed securities | 447,437 | 461,077 | 13,640 | 419,510 | 428,725 | 9,215 | 450,334 | 460,927 | 10,593 | |||||||||||||||||||||
Obligations of state and political subdivisions | 74,948 | 80,116 | 5,168 | 56,003 | 60,732 | 4,729 | 59,736 | 63,761 | 4,025 | |||||||||||||||||||||
Equity and other securities | 11,240 | 11,885 | 645 | 11,318 | 12,046 | 728 | 11,345 | 12,038 | 693 | |||||||||||||||||||||
Total Investment Portfolio | $ | 773,856 | $ | 792,657 | $ | 18,801 | $ | 717,593 | $ | 729,844 | $ | 12,251 | $ | 810,249 | $ | 823,458 | $ | 13,209 |
At September 30, 2012, the estimated fair value of the investment portfolio was $792.7 million, compared to $729.8 million at year end 2011, an increase of 8.6% or $62.9 million. The net unrealized gain in the investment portfolio was $18.8 million at September 30, 2012, an increase from $12.3 million at December 31, 2011.
The investment portfolio (amortized cost) increased $56.3 million since December 31, 2011. The Company has increased its investments in municipal securities and its U.S. government agency portfolio. During this time, purchases consisted principally of Oregon and Washington school district municipal securities with state guarantees and 10-year and 15-year fully amortizing U.S. government agency mortgage-backed securities. The expected duration of the investment portfolio was 2.7 years at September 30, 2012, compared to 2.3 years at September 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 the Companys 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. While this security had an impairment loss of $1.5 million at September 30, 2012, the security had no credit related OTTI as of September 30, 2012.
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For additional detail regarding the Companys investment securities portfolio, see Note 4 Investment Securities and Note 10 Fair Value Measurement and Fair Values of Financial Instruments of the 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) | September 30, | % of total | Dec. 31, | % of total | Change | September 30, | % of total | Change | ||||||||||||||||||
2012 | loans | 2011 | loans | Amount | 2011 | loans | Amount | |||||||||||||||||||
Commercial loans | $ | 286,134 | 19.2 | % | $ | 299,766 | 20.0 | % | $ | (13,632 | ) | $ | 296,335 | 19.7 | % | $ | (10,201 | ) | ||||||||
Commercial real estate construction | 39,100 | 2.6 | % | 17,438 | 1.2 | % | 21,662 | 12,859 | 0.9 | % | 26,241 | |||||||||||||||
Residential real estate construction | 8,306 | 0.6 | % | 12,724 | 0.8 | % | (4,418 | ) | 13,167 | 0.9 | % | (4,861 | ) | |||||||||||||
Total real estate construction loans | 47,406 | 3.2 | % | 30,162 | 2.0 | % | 17,244 | 26,026 | 1.8 | % | 21,380 | |||||||||||||||
Mortgage | 56,548 | 3.8 | % | 66,610 | 4.4 | % | (10,062 | ) | 69,333 | 4.6 | % | (12,785 | ) | |||||||||||||
Home equity loans and lines of credit | 244,683 | 16.4 | % | 258,384 | 17.2 | % | (13,701 | ) | 261,457 | 17.4 | % | (16,774 | ) | |||||||||||||
Total real estate mortgage loans | 301,231 | 20.2 | % | 324,994 | 21.6 | % | (23,763 | ) | 330,790 | 22.0 | % | (29,559 | ) | |||||||||||||
Commercial real estate loans | 843,836 | 56.6 | % | 832,767 | 55.4 | % | 11,069 | 836,752 | 55.6 | % | 7,084 | |||||||||||||||
Installment and other consumer loans | 12,160 | 0.8 | % | 13,612 | 1.0 | % | (1,452 | ) | 13,721 | 0.9 | % | (1,561 | ) | |||||||||||||
Total loans | $ | 1,490,767 | 100.0 | % | $ | 1,501,301 | 100.0 | % | $ | (10,534 | ) | $ | 1,503,624 | 100.0 | % | $ | (12,857 | ) |
The Banks total loan portfolio was $1.5 billion at September 30, 2012, a decrease of $10.5 million or .7% from December 31, 2011. The decline was principally a result of lower commercial, mortgage, and home equity balances partially offset by higher commercial real estate construction and commercial real estate term loan balances. The Banks loan portfolio decreased $12.9 million from September 30, 2011. Third quarter 2012 new loan commitment production increased significantly from the same quarter of 2011.
Interest and fees earned on the loan portfolio are the Banks 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. The Companys 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 the ability to close loans in the pipeline.
At September 30, 2012, the Bank had outstanding loans of $.2 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 September 30, 2012, and December 31, 2011, Bancorp had no bankers acceptances.
Below is a discussion of the Companys loan portfolio by category.
Commercial. At September 30, 2012, the outstanding balance of commercial loans and lines was $286.1 million or approximately 19% of the Companys total loan portfolio. The total commercial lines and loans balance decreased by $13.7 million or 5% from $299.8 million at year end 2011.
At September 30, 2012, commercial lines of credit accounted for $179.0 million or 63% of total outstanding commercial loans and lines, while commercial term loans accounted for $107.1 million, or 37% of the total.
Real Estate Construction. At September 30, 2012, the balance of real estate construction loans was $47.4 million, an increase of $17.2 million or 57% from $30.2 million at December 31, 2011, with the increase centered in commercial real estate construction loans. Total real estate construction loans represented approximately 3% of the total loan portfolio at the end of the third quarter compared to 2% at December 31, 2011. Additionally, at the end of the third quarter 2012, the Banks real estate construction concentration at 12% 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 well below the activity in years prior to the most recent recession. For certain home price levels, there is also uncertainty surrounding the level of shadow inventory that may exist in the market. As a consequence, there is relatively limited overall demand for new single family residential construction loans in the Banks market place. While the Bank participates in a limited way in vertical construction financing it still views residential construction lending as high risk.
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Real Estate Mortgage. The following table presents the components of the real estate mortgage loan portfolio:
Change from | |||||||||||||||||||||||||
September 30, 2012 | December 31, 2011 | December 31, 2011 | September 30, 2011 | ||||||||||||||||||||||
Percent of | Percent of | Percent of | |||||||||||||||||||||||
loan | loan | loan | |||||||||||||||||||||||
(Dollars in thousands) | Amount | category | Amount | category | Amount | Percent | Amount | category | |||||||||||||||||
Mortgage | $ | 56,548 | 19 | % | $ | 66,610 | 21 | % | $ | (10,062 | ) | -15 | % | $ | 69,333 | 21 | % | ||||||||
Home equity loans and lines of credit | 244,683 | 81 | % | 258,384 | 79 | % | (13,701 | ) | -5 | % | 261,457 | 79 | % | ||||||||||||
Total real estate mortgage | $ | 301,231 | 100 | % | $ | 324,994 | 100 | % | $ | (23,763 | ) | -7 | % | $ | 330,790 | 100 | % |
At September 30, 2012, real estate mortgage loans totaled $301.2 million or approximately 20% of the Companys total loan portfolio. The mortgage loan category included $5.9 million in nonstandard mortgage loans, a decline from $8.5 million at December 31, 2011, and $9.9 million a year ago. At September 30, 2012, mortgage loans excluding nonstandard mortgage loans measured $50.6 million, a decline from $59.4 million a year ago. Standard residential mortgage loans to borrowers represented $26.2 million of the mortgage loan category, while the remaining $24.4 million were associated with commercial interests utilizing residences as collateral. Such commercial interests included $17.0 million related to businesses, $1.8 million related to condominiums, and $2.2 million related to ownership of residential land.
Home equity lines and loans, totaled $244.7 million, and represented 16% of the loan portfolio at September 30, 2012, a decline of $16.8 million from $261.5 million a year earlier. The overall home equity line utilization measured approximately 62% at September 30, 2012, which was relatively unchanged from the line utilization a year ago. The Banks home equity portfolio balances have trended lower as payoffs have increased and 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 the Company no longer has a branch presence, indicates a geographic distribution of balances remaining fairly representative of the Banks branch presence in these markets:
(Dollars in thousands) | September 30, 2012 | December 31, 2011 | ||||||||||
Region | Amount | Percent of total | Amount | Percent of total | ||||||||
Portland-Beaverton, Oregon / Vancouver, Washington | $ | 115,648 | 47.2 | % | $ | 122,543 | 47.4 | % | ||||
Salem, Oregon | 59,892 | 24.4 | % | 61,019 | 23.6 | % | ||||||
Oregon non-metropolitan area | 26,139 | 10.7 | % | 27,419 | 10.6 | % | ||||||
Olympia, Washington | 15,335 | 6.3 | % | 17,268 | 6.7 | % | ||||||
Washington non-metropolitan area | 12,368 | 5.1 | % | 12,859 | 5.0 | % | ||||||
Bend, Oregon | 3,837 | 1.6 | % | 4,377 | 1.7 | % | ||||||
Other | 11,464 | 4.7 | % | 12,899 | 5.0 | % | ||||||
Total home equity loan and line portfolio | $ | 244,683 | 100 | % | $ | 258,384 | 100.0 | % |
Should weaknesses in the housing market continue, coupled with persistent high unemployment in the Companys 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 September 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) | September 30, 2012 | December 31, 2011 | September 30, 2011 | |||||||||||||||
% of loan | % of loan | % of loan | ||||||||||||||||
Amount | category | Amount | category | Amount | category | |||||||||||||
Office Buildings | $ | 171,213 | 20.3 | % | $ | 173,295 | 20.8 | % | $ | 183,146 | 21.9 | % | ||||||
Retail Facilities | 119,482 | 14.2 | % | 118,678 | 14.3 | % | 114,606 | 13.7 | % | |||||||||
Multi-Family - 5+ Residential | 86,327 | 10.2 | % | 63,027 | 7.6 | % | 60,731 | 7.3 | % | |||||||||
Commercial/Agricultural | 60,711 | 7.2 | % | 60,094 | 7.2 | % | 60,059 | 7.2 | % | |||||||||
Medical Offices | 57,705 | 6.8 | % | 60,993 | 7.3 | % | 57,781 | 6.9 | % | |||||||||
Industrial parks and related | 56,234 | 6.7 | % | 55,392 | 6.7 | % | 58,310 | 7.0 | % | |||||||||
Hotels/Motels | 48,162 | 5.7 | % | 35,893 | 4.3 | % | 35,027 | 4.2 | % | |||||||||
Manufacturing Plants | 47,241 | 5.6 | % | 51,852 | 6.2 | % | 53,109 | 6.3 | % | |||||||||
Mini Storage | 22,413 | 2.7 | % | 19,037 | 2.3 | % | 21,795 | 2.6 | % | |||||||||
Food Establishments | 19,096 | 2.3 | % | 19,054 | 2.3 | % | 19,132 | 2.3 | % | |||||||||
Assisted Living | 17,291 | 2.0 | % | 22,040 | 2.6 | % | 22,191 | 2.7 | % | |||||||||
Land Development and Raw Land | 9,472 | 1.1 | % | 17,278 | 2.1 | % | 20,318 | 2.4 | % | |||||||||
Other | 128,489 | 15.2 | % | 136,134 | 16.3 | % | 130,547 | 15.5 | % | |||||||||
Total commercial real estate loans | $ | 843,836 | 100.0 | % | $ | 832,767 | 100.0 | % | $ | 836,752 | 100.0 | % |
The total commercial real estate portfolio increased $11.0 million or 1.3% from $832.8 million at December 31, 2011, to $843.8 million at September 30, 2012. At September 30, 2012, loans secured by office buildings and retail facilities accounted for 34.5% of the commercial real estate portfolio, relatively unchanged from prior periods shown. The average size of the Banks commercial real estate loans was approximately $.5 million at September 30, 2012.
The composition of the commercial real estate loan portfolio by occupancy type was as follows:
September 30, 2012 | December 31, 2011 | Change | September 30, 2011 | ||||||||||||||||||||||
Mix | Mix | Mix | |||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||
Owner occupied | $ | 360,640 | 43 | % | $ | 390,589 | 47 | % | $ | (29,949 | ) | -4 | % | $ | 394,563 | 47 | % | ||||||||
Non-owner occupied | 483,196 | 57 | % | 442,178 | 53 | % | 41,018 | 4 | % | 442,189 | 53 | % | |||||||||||||
Total commercial real estate loans | $ | 843,836 | 100 | % | $ | 832,767 | 100 | % | $ | 11,069 | $ | 836,752 | 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 September 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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The following table shows the distribution of the commercial real estate portfolio at September 30, 2012.
(Dollars in thousands) | September 30, 2012 | |||||||
Number of | Percent of | |||||||
Region | Amount | loans | total | |||||
Portland-Beaverton, Oregon / Vancouver, Washington | $ | 421,849 | 697 | 50 | % | |||
Salem, Oregon | 168,010 | 366 | 20 | % | ||||
Oregon non-metropolitan area | 53,955 | 150 | 6 | % | ||||
Seattle-Tacoma-Bellevue, Washington | 35,279 | 47 | 4 | % | ||||
Olympia, Washington | 31,161 | 73 | 4 | % | ||||
Washington non-metropolitan area | 29,142 | 99 | 3 | % | ||||
Bend, Oregon | 24,004 | 23 | 3 | % | ||||
Other | 80,436 | 123 | 10 | % | ||||
Total commercial real estate loans | $ | 843,836 | 1,578 | 100 | % |
The following table shows the commercial real estate portfolio by year of stated maturity:
September 30, 2012 | ||||||||
Number of | Percent of | |||||||
(Dollars in thousands) | Amount | loans | total | |||||
2012 | $ | 22,668 | 32 | 2.7 | % | |||
2013 | 50,007 | 99 | 5.9 | % | ||||
2014 & After | 771,161 | 1,447 | 91.4 | % | ||||
Total commercial real estate loans | $ | 843,836 | 1,578 | 100.0 | % |
At September 30, 2012, commercial real estate loans with stated loan maturities in 2012 and 2013 totaled $72.7 million or a relatively modest 8.6% of the $843.8 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:
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | September 30, 2011 | |||||||||||||||||||
Percent of | |||||||||||||||||||||||
loan | |||||||||||||||||||||||
(Dollars in thousands) | Amount | category | Amount | Amount | Amount | Amount | |||||||||||||||||
Commercial loans | $ | 6,643 | 2.3 | % | $ | 6,199 | $ | 6,482 | $ | 7,750 | $ | 9,987 | |||||||||||
Real estate construction loans: | |||||||||||||||||||||||
Commercial real estate construction | 1,650 | 4.2 | % | 3,750 | 3,749 | 3,750 | 3,886 | ||||||||||||||||
Residential real estate construction | 1,851 | 22.3 | % | 1,936 | 1,981 | 2,073 | 3,311 | ||||||||||||||||
Total real estate construction loans | 3,501 | 7.4 | % | 5,686 | 5,730 | 5,823 | 7,197 | ||||||||||||||||
Real estate mortgage loans: | |||||||||||||||||||||||
Mortgage | 6,170 | 10.9 | % | 7,044 | 10,744 | 9,624 | 10,877 | ||||||||||||||||
Home equity loans and lines of credit | 2,845 | 1.2 | % | 2,239 | 2,528 | 2,325 | 3,285 | ||||||||||||||||
Total real estate mortgage loans | 9,015 | 3.0 | % | 9,283 | 13,272 | 11,949 | 14,162 | ||||||||||||||||
Commercial real estate loans | 13,248 | 1.6 | % | 12,384 | 16,648 | 15,070 | 21,513 | ||||||||||||||||
Installment and other consumer loans | - | 0.0 | % | - | 1 | 5 | 6 | ||||||||||||||||
Total nonaccrual loans | 32,407 | 2.2 | % | 33,552 | 42,133 | 40,597 | 52,865 | ||||||||||||||||
90 day past due and accruing interest | - | - | - | - | - | ||||||||||||||||||
Total nonperforming loans | 32,407 | 2.2 | % | 33,552 | 42,133 | 40,597 | 52,865 | ||||||||||||||||
Other real estate owned | 21,939 | 25,726 | 27,525 | 30,823 | 30,234 | ||||||||||||||||||
Total nonperforming assets | $ | 54,346 | $ | 59,278 | $ | 69,658 | $ | 71,420 | $ | 83,099 | |||||||||||||
Nonperforming loans to total loans | 2.17 | % | 2.24 | % | 2.86 | % | 2.70 | % | 3.52 | % | |||||||||||||
Nonperforming assets to total assets | 2.19 | % | 2.46 | % | 2.89 | % | 2.94 | % | 3.30 | % | |||||||||||||
Delinquent loans 30-89 days past due | $ | 2,963 | $ | 3,422 | $ | 4,095 | $ | 4,273 | $ | 5,556 | |||||||||||||
Delinquent loans to total loans | 0.20 | % | 0.23 | % | 0.28 | % | 0.28 | % | 0.37 | % |
At September 30, 2012, total nonperforming assets were $54.3 million, or 2.19% of total assets, compared to $71.4 million, or 2.94%, at December 31, 2011, and $83.1 million or 3.30% a year ago.
Total nonaccrual loans of $32.4 million declined $8.2 million or 20% from year end and $20.5 million or 39% from September 30, 2011. Nonaccrual loans as of September 30, 2012, declined in every loan category compared to twelve months earlier.
Troubled Debt Restructurings. At September 30, 2012, Bancorp had $32.8 million in loans classified as troubled debt restructurings of which $15.8 million were on an interest accruing status and $17.0 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 September 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 3 Loans and Allowance for Credit Losses to the Companys audited consolidated financial statements included under the section Financial Statements and Supplementary Data in Item 8 of 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 | ||||
Third Quarter 2012 | |||||||
Additions to OREO | $ | 487 | 3 | ||||
Valuation adjustments | (486 | ) | - | ||||
Disposition of OREO properties | (3,788 | ) | (29 | ) | |||
Ending balance September 30, 2012 | $ | 21,939 | 218 | ||||
Year to Date 2012 | |||||||
Beginning balance January 1, 2012 | $ | 30,823 | 264 | ||||
Additions to OREO | 4,601 | 40 | |||||
Valuation adjustments | (2,220 | ) | - | ||||
Disposition of OREO properties | (11,265 | ) | (86 | ) | |||
Ending balance September 30, 2012 | $ | 21,939 | 218 |
During the third quarter 2012 the Company added $.5 million in OREO property, disposed of $3.8 million in OREO property, and recorded OREO valuation adjustments of $.5 million. OREO valuation adjustments are recorded as other noninterest income. At September 30, 2012, the OREO portfolio consisted of 218 properties, which was valued at $21.9 million and reflected write-downs of 57% from original loan principal. The largest balances in the OREO portfolio at September 30, 2012, were attributable to income producing properties, followed by land and homes, all of which are located within the region in which the Company operates, with the exception of Bend, Oregon, where it no longer has 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) | September 30, | # of | June 30, | # of | March 31, | # of | |||||||||
2012 | properties | 2012 | properties | 2012 | properties | ||||||||||
Income producing properties | $ | 7,749 | 11 | $ | 8,106 | 13 | $ | 9,352 | 15 | ||||||
Land | 4,104 | 13 | 4,780 | 15 | 4,710 | 14 | |||||||||
Homes | 3,518 | 14 | 5,539 | 20 | 5,228 | 16 | |||||||||
Residential site developments | 2,736 | 114 | 3,104 | 126 | 3,367 | 136 | |||||||||
Lots | 1,912 | 40 | 1,999 | 42 | 2,453 | 49 | |||||||||
Multifamily | 1,570 | 20 | 1,570 | 20 | 408 | 4 | |||||||||
Commercial site developments | 350 | 6 | 303 | 6 | 366 | 6 | |||||||||
Condominiums | - | - | 325 | 2 | 1,641 | 6 | |||||||||
Total | $ | 21,939 | 218 | $ | 25,726 | 244 | $ | 27,525 | 246 |
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Expenses from the acquisition, maintenance and disposition of OREO properties are included in other noninterest expense in the statements of income. The Banks operating results will be impacted by its ability to dispose of OREO properties at prices that are in line with current valuation expectations. Further decline in real estate market values in the Banks lending area would lead to additional OREO valuation adjustments or losses upon final disposal, which would have an adverse effect on the results of operations.
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 $3.0 million or .20% of total loans at September 30, 2012, down from $4.3 million or .28% at December 31, 2011, and $5.6 million or .37% at September 30, 2011.
The following table summarizes total delinquent loan balances by loan category as of the dates shown:
(Dollars in thousands) | September 30, 2012 | December 31, 2011 | September 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 | $ | 1,058 | 0.37 | % | $ | 683 | 0.23 | % | $ | 610 | 0.21 | % | |||||||||
Real estate construction | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | ||||||||||||
Real estate mortgage: | |||||||||||||||||||||
Mortgage | 1,004 | 1.98 | % | 1,355 | 2.03 | % | 455 | 0.77 | % | ||||||||||||
Nonstandard mortgage product | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | ||||||||||||
Home equity loans and lines of credit | 16 | 0.01 | % | 1,034 | 0.40 | % | 219 | 0.08 | % | ||||||||||||
Total real estate mortgage | 1,020 | 0.34 | % | 2,389 | 0.74 | % | 674 | 0.20 | % | ||||||||||||
Commercial real estate | 722 | 0.09 | % | 1,145 | 0.14 | % | 4,184 | 0.50 | % | ||||||||||||
Installment and consumer | 163 | 1.34 | % | 56 | 0.41 | % | 88 | 0.64 | % | ||||||||||||
Total loans 30-89 days past due, not in nonaccrual status | $ | 2,963 | $ | 4,273 | $ | 5,556 | |||||||||||||||
Delinquent loans past due 30-89 days to total loans | 0.20 | % | 0.28 | % | 0.37 | % |
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.
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The following table is a summary of activity in the allowance for credit losses for the quarterly periods presented:
(Dollars in thousands) | Sep. 30, | June 30, | March 31, | Dec. 31, | Sep. 30, | |||||||||||||||
2012 | 2012 | 2012 | 2011 | 2011 | ||||||||||||||||
Loans outstanding at end of period | $ | 1,490,767 | $ | 1,495,797 | $ | 1,470,848 | $ | 1,501,301 | $ | 1,503,624 | ||||||||||
Average loans outstanding during the period | 1,493,454 | 1,479,226 | 1,482,522 | 1,498,437 | 1,515,091 | |||||||||||||||
Allowance for credit losses, beginning of period | 33,900 | 34,634 | 35,983 | 37,016 | 39,231 | |||||||||||||||
Total provision (benefit) for credit losses | (593 | ) | (492 | ) | 89 | 1,499 | 1,132 | |||||||||||||
Loan charge-offs: | ||||||||||||||||||||
Commercial | (203 | ) | (379 | ) | (634 | ) | (710 | ) | (1,462 | ) | ||||||||||
Commercial real estate construction | (150 | ) | - | - | (136 | ) | (472 | ) | ||||||||||||
Residential real estate construction | - | - | (3 | ) | (143 | ) | (95 | ) | ||||||||||||
Total real estate construction | (150 | ) | - | (3 | ) | (279 | ) | (567 | ) | |||||||||||
Mortgage | (130 | ) | (122 | ) | (691 | ) | (191 | ) | (257 | ) | ||||||||||
Home equity lines of credit | (454 | ) | (354 | ) | (548 | ) | (760 | ) | (547 | ) | ||||||||||
Total real estate mortgage | (584 | ) | (476 | ) | (1,239 | ) | (951 | ) | (804 | ) | ||||||||||
Commercial real estate | (149 | ) | (549 | ) | (62 | ) | (834 | ) | (800 | ) | ||||||||||
Installment and consumer | (64 | ) | (70 | ) | (191 | ) | (130 | ) | (32 | ) | ||||||||||
Overdraft | (166 | ) | (182 | ) | (228 | ) | (288 | ) | (279 | ) | ||||||||||
Total loan charge-offs | (1,316 | ) | (1,656 | ) | (2,357 | ) | (3,192 | ) | (3,944 | ) | ||||||||||
Recoveries: | ||||||||||||||||||||
Commercial | 101 | 156 | 639 | 418 | 281 | |||||||||||||||
Commercial real estate construction | 2 | - | - | 88 | - | |||||||||||||||
Residential real estate construction | 4 | 29 | 2 | 3 | 182 | |||||||||||||||
Total real estate construction | 6 | 29 | 2 | 91 | 182 | |||||||||||||||
Mortgage | 29 | 30 | 157 | 14 | 11 | |||||||||||||||
Home equity loans and lines of credit | 81 | 18 | 6 | 37 | 31 | |||||||||||||||
Total real estate mortgage | 110 | 48 | 163 | 51 | 42 | |||||||||||||||
Commercial real estate | 23 | 1,129 | 21 | 22 | 21 | |||||||||||||||
Installment and consumer | 16 | 13 | 26 | 11 | 26 | |||||||||||||||
Overdraft | 41 | 39 | 68 | 67 | 45 | |||||||||||||||
Total recoveries | 297 | 1,414 | 919 | 660 | 597 | |||||||||||||||
Net loan charge-offs | (1,019 | ) | (242 | ) | (1,438 | ) | (2,532 | ) | (3,347 | ) | ||||||||||
Allowance for credit losses, end of period | $ | 32,288 | $ | 33,900 | $ | 34,634 | $ | 35,983 | $ | 37,016 | ||||||||||
Components of allowance for credit losses | ||||||||||||||||||||
Allowance for loan losses | $ | 31,457 | $ | 33,132 | $ | 33,854 | $ | 35,212 | $ | 36,314 | ||||||||||
Reserve for unfunded commitments | 831 | 768 | 780 | 771 | 702 | |||||||||||||||
Total allowance for credit losses | $ | 32,288 | $ | 33,900 | $ | 34,634 | $ | 35,983 | $ | 37,016 | ||||||||||
Net loan charge-offs to average loans annualized | 0.27 | % | 0.07 | % | 0.39 | % | 0.67 | % | 0.88 | % | ||||||||||
Allowance for loan losses to total loans | 2.11 | % | 2.22 | % | 2.30 | % | 2.35 | % | 2.42 | % | ||||||||||
Allowance for credit losses to total loans | 2.17 | % | 2.27 | % | 2.35 | % | 2.40 | % | 2.46 | % | ||||||||||
Allowance for loan losses to nonperforming loans | 97 | % | 99 | % | 80 | % | 87 | % | 69 | % | ||||||||||
Allowance for credit losses to nonperforming loans | 100 | % | 101 | % | 82 | % | 89 | % | 70 | % |
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At September 30, 2012, the Companys allowance for credit losses was $32.3 million, consisting of a $27.0 million formula allowance, a $3.8 million unallocated allowance, a $.7 million specific allowance and a $.8 million reserve for unfunded commitments. At December 31, 2011, the Companys 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 third quarter 2012, compared to the same quarter of 2011, reflects an overall improving risk profile of the loan portfolio, as evidenced by charge-off activity, low delinquency, and a positive risk rating migration. The level of net loan charge-offs in the year to date 2012 was heavily influenced by a recovery of $1.1 million related to a commercial real estate loan in the second quarter of 2012. At September 30, 2012, the allowance for credit losses was 2.17% of total loans, a decrease from 2.40% at December 31, 2011. At September 30, 2012, the allowance for credit losses was 100% of nonperforming loans, as compared to 89% at December 31, 2011, and 70% twelve months earlier.
Overall, the Company believes that the allowance for credit losses is adequate to absorb probable losses in the loan portfolio at September 30, 2012, although there can be no assurance that future loan losses will not exceed current estimates. The process for determining the adequacy of the allowance for credit losses is critical to the Companys financial results. Please see Item 1A Risk Factors in the Companys 2011 10-K.
Net Loan Charge-offs. For the quarter ended September 30, 2012, total net loan charge-offs were $1.0 million, down from $3.3 million in the third quarter of 2011. Year-over-year third quarter, net loan charge-offs declined across nearly every category. Third quarter 2012 annualized net loan charge-offs to total average loans outstanding was 0.27%, down from 0.88% in the same quarter last year and up from 0.07% 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 third quarters of 2012 and 2011 and second quarter 2012:
Third Quarter 2012 | Second Quarter 2012 | Third Quarter 2011 | |||||||||||||||||||||||||
Quarterly Average | Percent | Rate | Quarterly Average | Percent | Rate | Quarterly Average | Percent | Rate | |||||||||||||||||||
(Dollars in thousands) | Balance | of total | Paid | Balance | of total | Paid | Balance | of total | Paid | ||||||||||||||||||
Non-interest bearing demand | $ | 677,646 | 35.5 | % | - | $ | 621,547 | 33.2 | % | - | $ | 615,956 | 31.5 | % | - | ||||||||||||
Interest bearing demand | 365,560 | 19.2 | % | 0.04 | % | 374,579 | 20.0 | % | 0.04 | % | 363,554 | 18.6 | % | 0.05 | % | ||||||||||||
Savings | 132,839 | 7.0 | % | 0.05 | % | 127,930 | 6.8 | % | 0.05 | % | 114,779 | 5.9 | % | 0.09 | % | ||||||||||||
Money market | 592,363 | 31.0 | % | 0.09 | % | 596,949 | 31.9 | % | 0.09 | % | 661,871 | 33.9 | % | 0.19 | % | ||||||||||||
Time deposits | 140,151 | 7.3 | % | 0.57 | % | 151,085 | 8.1 | % | 0.66 | % | 196,807 | 10.1 | % | 1.20 | % | ||||||||||||
Total deposits | 1,908,559 | 100.0 | % | 0.08 | % | 1,872,090 | 100.0 | % | 0.09 | % | 1,952,967 | 100.0 | % | 0.20 | % | ||||||||||||
Short-term borrowings 1 | 17,989 | 0.81 | % | 3,143 | 0.51 | % | 39,926 | 9.33 | % | ||||||||||||||||||
Long-term borrowings 1 2 | 161,074 | 1.14 | % | 175,098 | 1.44 | % | 180,428 | 7.60 | % | ||||||||||||||||||
Total borrowings | 179,063 | 1.45 | % | 178,241 | 1.44 | % | 220,354 | 7.91 | % | ||||||||||||||||||
Total deposits and borrowings | $ | 2,087,622 | 0.29 | % | $ | 2,050,331 | 0.30 | % | $ | 2,173,321 | 1.37 | % |
1 | Includes $2.8 million prepayment fee in connections with prepaying $88.3 million in FHLB borrowings in the third quarter 2011. |
2 | Long-term borrowings include junior subordinated debentures. |
Third quarter 2012 average total deposits of $1.91 billion declined 2%, or $44.4 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 $69.5 million and $56.7 million, respectively, from the same quarter last year. Time deposits represented just 7% of the Banks average total deposits in the most recent quarter, a decline from 10% in the third 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 0.08% in third quarter 2012, a decline of 12 basis points from 0.20% in the same quarter of 2011 and a decline of one basis point from .09% in the second quarter of 2012. Whether the Company will continue to be successful maintaining its 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 September 30, 2012, the Bank did not hold any brokered deposits as compared to $6.0 million at December 31, 2011, and $7.3 million at September 30, 2011. Brokered deposits were not replaced as they matured.
The average balance of long-term borrowings decreased $19.4 million to $161.1 million in the quarter ended September 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 September 30, 2012, the balance of junior subordinated debentures issued in connection with the Companys prior issuances of trust preferred securities was $51.0 million or unchanged from September 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) | September 30, | December 31, | September 30, | December 31, | Adequately | Well | |||||||||||||||||||||||||
2012 | 2011 | 2011 | 2012 | 2011 | 2011 | Capitalized | Capitalized | ||||||||||||||||||||||||
Tier 1 risk-based capital ratio | 20.45 | % | 18.43 | % | 19.36 | % | 19.80 | % | 17.74 | % | 18.66 | % | 4.00 | % | 6.00 | % | |||||||||||||||
Total risk-based capital ratio | 21.62 | % | 19.69 | % | 20.62 | % | 21.06 | % | 19.00 | % | 19.92 | % | 8.00 | % | 10.00 | % | |||||||||||||||
Leverage ratio | 15.48 | % | 13.72 | % | 14.61 | % | 15.00 | % | 13.20 | % | 14.09 | % | 4.00 | % | 5.00 | % | |||||||||||||||
Total stockholders' equity | $ | 335,996 | $ | 296,867 | $ | 314,479 | $ | 374,769 | $ | 334,746 | $ | 352,187 |
Bancorps total risk-based capital ratio increased to 21.62% at September 30, 2012, from 20.62% at December 31, 2011, and 19.69% at September 30, 2011, while Bancorp's Tier 1 risk-based capital ratio increased to 20.45% at the most recent quarter end, from 19.36% at year end 2011 and 18.43% at September 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 21.06% at September 30, 2012, from 19.92% at year end 2011, and 19.00% at September 30, 2011, while the Banks Tier 1 risk-based capital ratio increased to 19.80% from 18.66% and 17.74% as of the same respective dates. Additionally, the leverage ratio at the Bank improved to 15.00% at September 30, 2012, from 14.09% at year end 2011, and 13.20% 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 September 30, 2012, under guidance issued by the Federal Reserve. The Company will monitor the finalization of the Basel III Capital Rules, including whether its junior subordinated debentures will continue to qualify for Tier 1 capital under the final rules.
Bancorps stockholders equity was $336.0 million at September 30, 2012, up from $314.5 million at year end 2011 and $296.9 million at September 30, 2011.
- 51 -
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 the Banks primary source of funds, and at September 30, 2012, its loan to deposit ratio was 77%, relatively unchanged from December 31, 2011, and September 30, 2011. Declining loan balances over the past few years caused the collective balance of interest bearing deposits and investment securities portfolio of $841.0 million to account for a significant 36% of total earning assets at September 30, 2012. In light of the Banks substantial liquidity position it 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 liquidity ratio consists of the sum of net cash, short-term and marketable assets divided by total deposits. The net non-core funding dependency ratio is non-core liabilities less short-term investments divided by long-term assets. T he Banks primary liquidity, on-balance sheet liquidity, and net non-core funding dependency ratios remained strong at quarter end:
September 30, | December 31, | |||||
2012 | 2011 | |||||
Primary liquidity | 48 | % | 45 | % | ||
On-balance sheet liquidity | 29 | % | 26 | % | ||
Net non-core funding dependency | 5 | % | 6 | % |
At September 30, 2012, the Bank had outstanding borrowings of $127.9 million, against its $455.0 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 $42.2 million at September 30, 2012, with no balance outstanding at either September 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 September 30, 2012, the holding company did not have any borrowing arrangements of its own.
Off-Balance Sheet Arrangements
At September 30, 2012, the Bank had commitments to extend credit of $561.4 million, which was down 2.3% compared to $574.3 million at December 31, 2011. For additional information regarding off balance sheet arrangements and future financial commitments, see Note 8 Commitments and Contingent Liabilities in the financial statements included under Item 1 of this report.
Critical Accounting Policies
Management has identified as the Companys most critical accounting policies, the calculation of its allowance for credit losses, valuation of OREO, and estimates relating to income taxes. Each of these policies are discussed in the Companys 2011 10-K under the heading Managements Discussion and Analysis of Financial Condition and Results of Operation Critical Accounting Policies.
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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
The Companys 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 its management, including the chief executive officer (CEO) and chief financial officer (CFO), as appropriate to allow timely decisions regarding required disclosure. Management has evaluated, with the participation and under the supervision of the CEO and CFO, the effectiveness of the Companys 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, the 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 its management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in the Companys internal controls over financial reporting during its most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal controls over financial reporting.
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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. Appeals Court oral arguments are scheduled in November, 2012. The Company believes the appeal and underlying petition are without merit.
On October 3, 2012, a class action complaint was filed in the Circuit Court of the State of Oregon for the County of Multnomah against Bancorp, its directors, and Columbia challenging the Merger (as defined above): Gary M. Klein v. West Coast Bancorp, et al., Case No. 1210-12431. The complaint names as defendants Bancorp, all of the current members of Bancorps board of directors, and Columbia. The complaint alleges that the Bancorp directors breached their fiduciary duties to Bancorp and Bancorp shareholders by agreeing to the proposed Merger at an unfair price. The complaint also alleges that the proposed Merger is being driven by an unfair process, that the directors approved provisions in the Merger Agreement that constitute preclusive deal protection devices, that certain large shareholders of Bancorp are using the Merger as an opportunity to sell their illiquid holdings in Bancorp, and that Bancorp directors and officers will obtain personal benefits from the Merger not shared equally by other Bancorp shareholders. The complaint further alleges that Bancorp and Columbia aided and abetted the directors alleged breaches of their fiduciary duties. The defendants believe this action is 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 liquidity position and 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.
The anticipated benefits of the Merger may not be realized.
The success of the Merger will depend, in part, on Columbias ability to successfully combine the Columbia and Bancorp organizations. If Columbia is not able to achieve this objective, the anticipated benefits of the Merger may not be realized fully or at all or may take longer than expected to be realized.
Columbia and Bancorp have operated and, until the completion of the Merger, will continue to operate, independently. It is possible that the integration process or other factors could result in the loss or departure of key employees, the disruption of the ongoing business of Bancorp or inconsistencies in standards, controls, procedures and policies. It is also possible that clients, customers, depositors and counterparties of Bancorp could choose to discontinue their relationships with the combined company pre- or post-Merger because they prefer doing business with an independent company or for any other reason, which would adversely affect the future performance of the combined company. These transition matters could have an adverse effect on Bancorp during the pre-Merger period and on the combined company for an undetermined time after the completion of the Merger.
The Merger Agreement limits Bancorps ability to pursue an alternative transaction and requires Bancorp to pay a termination fee of $20,000,000 under certain circumstances relating to alternative acquisition proposals.
The Merger Agreement prohibits Bancorp from soliciting, initiating, encouraging or knowingly facilitating certain alternative acquisition proposals with any third party, subject to exceptions set forth in the Merger Agreement. The Merger Agreement also provides for the payment by Bancorp to Columbia of a termination fee of $20,000,000 in the event that the Merger Agreement is terminated in certain circumstances, involving, among others, certain changes in the recommendation of Bancorps board of directors, a failure of Bancorps shareholders to approve the Merger Agreement or the termination of the Merger Agreement in certain circumstances followed by an acquisition of Bancorp by a third party. These provisions may discourage a potential competing acquiror that might have an interest in acquiring Bancorp from considering or proposing such an acquisition.
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The Merger is subject to the receipt of consents and approvals from governmental entities that may impose conditions that could have an adverse effect on the Bancorp or the combined company following the Merger.
Before the Merger may be completed, various approvals and consents must be obtained from the Federal Reserve Board, the Oregon Department of Consumer and Business Services and various other securities, antitrust, and other regulatory authorities. These governmental entities may impose conditions on the granting of such approvals and consents. Although Columbia and Bancorp do not currently expect that any such material conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the Merger or imposing additional costs or limiting the revenues of the combined company following the Merger, any of which might have an adverse effect on Bancorp or the combined company following the Merger. In addition, each of Columbia and Bancorp has agreed to use its reasonable best efforts to avoid or overcome impediments to completing the Merger, including, among other things, making expenditures and incurring costs, raising capital, divesting or otherwise disposing of businesses or assets, and effecting the dissolution, internal merger or consolidation of subsidiaries or enhancing internal controls. Such actions may entail costs and may adversely affect Bancorp, or the combined company following the Merger.
The Merger is subject to certain closing conditions that, if not satisfied or waived, will result in the Merger not being completed, which may cause the price of Bancorp common stock to decline.
The Merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and approvals of the Columbia and Bancorp shareholders. If any condition to the Merger is not satisfied or waived, to the extent permitted by law, the Merger will not be completed. In addition, Columbia and Bancorp may terminate the Merger Agreement under certain circumstances even if the Merger Agreement is approved by Bancorp shareholders and the issuance of Columbia common stock in connection with the Merger is approved by Columbia shareholders. If Columbia and Bancorp do not complete the Merger, the trading price of Bancorp common stock may decline to the extent that the current price reflects a market assumption that the Merger will be completed. In addition, neither Bancorp nor Columbia would realize any of the expected benefits of having completed the Merger. If the Merger is not completed and Bancorps board of directors seeks another merger or business combination, Bancorp shareholders cannot be certain that Bancorp will be able to find a party willing to offer equivalent or more attractive consideration than the consideration Columbia has agreed to provide in the Merger. If the Merger is not completed, additional risks could materialize, which could materially and adversely affect the business, financial condition and results of Bancorp.
The combined company expects to incur substantial expenses related to the Merger.
The combined company expects to incur substantial expenses in connection with completing the Merger and combining the business, operations, networks, systems, technologies, policies and procedures of the two companies. Although Columbia and Bancorp have assumed that a certain level of transaction and combination expenses would be incurred, there are a number of factors beyond their control that could affect the total amount or the timing of their combination expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Due to these factors, the transaction and combination expenses associated with the Merger could, particularly in the near term, exceed the savings that the combined company expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the combination of the businesses following the completion of the Merger. As a result of these expenses, both Columbia and Bancorp expect to take charges against their earnings before and after the completion of the Merger. The charges taken in connection with the Merger are expected to be significant, although the aggregate amount and timing of such charges are uncertain at present.
For detailed discussion of additional risks that may affect the Companys business, see Item 1A, Risk Factors in the Companys 2011 10-K .
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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 September 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 | |||||
7/1/12 - 7/31/12 | - | $ | 0.00 | - | 210,364 | ||||
8/1/12 - 8/31/12 | - | $ | 0.00 | - | 210,364 | ||||
9/1/12 - 9/30/12 | 20 | $ | 22.44 | - | 210,364 | ||||
Total for quarter | 20 | - |
(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 0 shares, 0 shares, and 20 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 September 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
Item 6. Exhibits
Exhibit No . | Exhibit | ||
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 |
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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: November 2, 2012 | /s/ Robert D. Sznewajs | |
Robert D. Sznewajs | ||
President and Chief Executive Officer | ||
Dated: November 2, 2012 | /s/ Anders Giltvedt | |
Anders Giltvedt | ||
Executive Vice President and Chief Financial Officer |
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1 Year West Coast Bancorp (MM) Chart |
1 Month West Coast Bancorp (MM) Chart |
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