PART I
ITEM 1.
BUSINESS
General
West Coast
Bancorp (“Bancorp” or the “Company”) is a bank holding company headquartered in
Lake Oswego, Oregon. Bancorp’s principal business activities are conducted
through its full-service, commercial bank subsidiary, West Coast Bank (the
“Bank”), an Oregon state-chartered bank with deposits insured by the Federal
Deposit Insurance Corporation (“FDIC”). At December 31, 2012, the Bank had
facilities in 41 cities and towns in western Oregon and southwestern Washington,
operating a total of 55 full-service and three limited-service branches and a
Small Business Administration (“SBA”) lending office in Vancouver, Washington.
Bancorp also owns West Coast Trust Company, Inc. (“West Coast Trust”), an Oregon
trust company that provides agency, fiduciary and other related trust services
with offices in Portland and Salem, Oregon.
Bancorp reports two principal operating segments in the notes to its
financial statements: West Coast Bank and West Coast Trust and parent company
related operations. For more information regarding Bancorp’s operating segments,
see Note 20 “Segment and Related Information” to the Company’s audited
consolidated financial statements included under the section “Financial
Statements and Supplementary Data” in Item 8 of this report.
Historical Information.
Bancorp enjoyed a period of sustained growth from 2000 – 2007. However,
in late 2007, with the onset of a significant slowdown in economic activity and
unprecedented disruptions in the real estate and credit markets, the Company
experienced significant net losses for two consecutive years and its balance
sheet contracted. Beginning in 2008, Bancorp and the Bank took several steps to
preserve capital and sustain or improve regulatory capital ratios, carefully
managing its capital position, reducing risk weighted assets, and focusing on
limiting operating expenses. During 2009 and 2010, Bancorp also raised a
significant amount of new capital.
As part of its capital raising efforts, in October 2009, Bancorp received
net proceeds of $139.2 million in a private capital raise (referred to in this
report as, the “Private Capital Raise”) in which it issued: 14,288,490 shares of
Common Stock; 121,328 shares of mandatorily convertible cumulative participating
preferred stock, Series B (“Series B Preferred Stock”) convertible into
1,213,280 shares of Common Stock upon satisfaction of certain conditions; and
Class C Warrants exercisable for a total of 240,000 shares of Series B Preferred
Stock at a price of $100.00 per share (the “Class C Warrants”) that are, in
turn, convertible into 2,400,000 shares of Common Stock, also upon satisfaction
of certain conditions.
Following the Private Capital Raise, Bancorp conducted a rights offering
of up to 1.0 million shares of Common Stock at a subscription price of $10.00
per share during the first quarter of 2010, raising net proceeds of $9.3
million, and in June 2010, Bancorp sold, through a discretionary equity issuance
program, an aggregate of .56 million shares of Common Stock at an average sales
price of $14.00 per share, with aggregate gross sales proceeds of $7.9 million.
Regulatory capital ratios
at Bancorp and the Bank improved significantly as a result of the Company’s
capital raising activities and return to profitability over the two and a half
years. For additional information regarding regulatory capital, see the
discussion under the subheading “Capital Resources” in Item 7 of this
report.
The Pacific Northwest is experiencing a slow economic recovery from the
prolonged recession and severe slump in housing and other real estate markets.
While values of the property that serves as collateral for many loans appear to
have stabilized, the market area continues to experience high unemployment and
weak new residential real estate construction activity. Among the effects of the
recession, the Bank has experienced a significant reduction in the size of its
loan portfolio and a significant increase in its portfolio of investment
securities. This shift in earning asset mix has resulted in significant downward
pressure on Bancorp’s net interest income and margin, its main source of
revenue.
As of December 31, 2012, Bancorp had total assets of $2.49 billion, with
total net loans of $1.47 billion and total investment securities of $772.1
million. Bancorp’s total deposits at December 31, 2012, were $1.94 billion and
stockholders’ equity was $339.2 million. At December 31, 2011, Bancorp had total
assets of $2.43 billion, total net loans of $1.47 billion and total investment
securities of $729.8 million. Bancorp’s total deposits at December 31, 2011,
were $1.92 billion, with stockholders’ equity of $314.5 million. At December 31,
2012, tangible book value per share was $16.49 up from $15.20 at December 31,
2011.
4
Net income for
the year ending December 31, 2012 was $23.5 million or $1.08 per diluted share,
down from net income of $33.8 million or $1.58 per diluted share for the year
ending December 31, 2011. The Company reported net income of $3.2 million or
$.16 per diluted share for the year ending December 31, 2010.
On September 25, 2012, Bancorp entered into an Agreement and Plan of
Merger (the “Merger Agreement”) with Columbia Banking System, Inc., a Washington
corporation (“Columbia”), pursuant to which Columbia will acquire Bancorp.
Consummation of the transaction 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. For more information regarding the Merger, see the discussion under the
subheading “Agreement and Plan of Merger” in this section below.
West Coast Bank
The Bank traces its origins to a bank organized in 1925 under the name
The Bank of Newport. The Bank in its current form resulted from the merger on
December 31, 1998, of the Bank of Newport of Newport, Oregon, The Commercial
Bank of Salem, Oregon, Bank of Vancouver of Vancouver, Washington and Centennial
Bank of Olympia, Washington, into a single entity. This entity was renamed West
Coast Bank. The Bank’s headquarters is located in Lake Oswego,
Oregon.
The Bank’s Oregon branches are located in the following cities and towns:
Beaverton, Canby, Clackamas, Dallas, Depoe Bay, Dundee, Eugene (2), Forest
Grove, Gresham, Happy Valley, Hillsboro (2), Keizer, King City, Lake Oswego,
Lincoln City, McMinnville, Molalla, Monmouth, Mt. Angel, Newberg, Newport (2),
North Plains, Oregon City, Portland (5), Salem (5), Silverton, Stayton,
Sublimity, Tigard, Tualatin, Waldport, Wilsonville and Woodburn (3). The Bank’s
Washington branches are located in Centralia, Chehalis, Hoodsport, Lacey (2),
Olympia (2), Shelton, Tukwila and Vancouver (3).
The primary business strategy of the Bank is to provide comprehensive
banking and related financial services within its local communities. The Bank
emphasizes the diversity and accessibility of its product lines and services and
conducts its business consistent with its client value proposition, which is to
provide products typically associated with larger financial organizations, while
maintaining the local decision making authority, market knowledge and customer
service orientation typically associated with a community bank. The Bank focuses
on four targeted areas: 1) high value consumers, 2) small businesses that desire
streamlined packaged products, 3) commercial businesses that benefit from
customized lending, deposit, cash management, and investment solutions and 4)
the principals and employees of associated commercial clients who have a
commercial relationship with West Coast Bank.
For consumer banking customers, the Bank offers a variety of checking and
savings accounts, check cards, and competitive borrowing products. Consumer
accounts consist of three streamlined checking account types, each specifically
designed to meet the needs of a unique market segment. Because of the
straightforward and easy to understand product design, our branch staff are able
to quickly and easily help clients identify the account that best fits their
needs. Financing products for consumers include residential real estate mortgage
loans, home equity lines and loans, personal lines of credit and consumer credit
cards. Customers have access to the Bank’s products and services through a
variety of convenient channels such as 24 hour 7 day a week automated phone and
internet access, a personal customer service center accessed by phone, and ATMs,
as well as through our branch locations.
For business banking customers, the Bank offers customized deposit
products tailored for specific needs, including a variety of checking accounts;
sophisticated internet-based cash management and payment solution products,
including iDeposit
SM
– a remote deposit capture product. The Bank
also offers a business online suite of products called eBiz Access
PLUS
SM
, which offers commercial clients a customized Treasury
Management Online Banking system featuring enhanced security features, real time
customizable reports, and expanded treasury management services that are all
accessed through a customized dashboard.
Customized financing packages provide businesses
with a comprehensive suite of credit facilities that include general commercial
loans, revolving lines of credit, real estate loans and lines to support
construction, owner occupied and investor financing and SBA loans. In addition,
the Bank offers business credit cards (VISA), extensive merchant service
options, equipment leasing through vendor alliances, and other types of business
credit.
5
West Coast Trust
West Coast
Trust provides trust services and life insurance products to individuals,
for-profit and not for-profit businesses and institutions. West Coast Trust acts
as fiduciary of estates and conservatorships, and as a trustee under various
wills, trusts, and pension and profit-sharing plans. The main office of West
Coast Trust is located at 1000 SW Broadway, Suite 1100, Portland, Oregon 97205,
(503) 279-3911. The market value of assets managed for others at December 31,
2012, was $296.1 million.
West Coast Statutory Trusts III, IV,
V, VI, VII and VIII
West Coast Statutory Trusts III, IV, V, VI, VII and VIII are wholly-owned
subsidiary trusts of Bancorp formed to facilitate the issuance of trust
preferred securities. The trusts were organized in September 2003, March 2004,
April 2006, December 2006, March 2007 and June 2007, respectively, in connection
with six offerings of trust preferred securities. For more information regarding
Bancorp’s trust preferred securities, see Note 9 “Junior Subordinated
Debentures” to the Company’s audited financial consolidated statements included
under the section “Financial Statements and Supplementary Data” in Item 8 of
this report.
Additional Information
Bancorp’s filings with the SEC, including its annual report on Form 10-K,
quarterly reports on Form 10-Q, periodic reports on Form 8-K and amendments to
these reports, are accessible free of charge at our website at
http://www.wcb.com
as soon
as reasonably practicable after filing with the SEC. By making this reference to
our website, we do not intend to incorporate into this report any information
contained in the website. The website should not be considered part of this
report.
The SEC maintains a website at
http://www.sec.gov
that contains
periodic reports, proxy and information statements, and other information
regarding issuers with publicly traded securities, including the Company.
Employees
At December 31, 2012, Bancorp and its
subsidiaries had approximately 627 employees. None of these employees are
represented by labor unions. Management believes that Bancorp’s relationship
with its employees is good. Bancorp emphasizes a positive work environment for
its employees and our work environment is measured annually utilizing an
anonymous employee survey. Management continually strives to retain top talent
as well as provide career development opportunities to enhance skill levels. A
number of benefit programs are available to eligible employees.
Competition
Commercial banking in the state of Oregon and southwest Washington is
highly competitive with respect to providing banking services, including making
loans and attracting deposits.
The Bank competes with other banks, as well as with savings
and loan associations, savings banks, credit unions, mortgage companies,
investment banks, insurance companies, securities brokerages and other financial
institutions. Banking in Oregon and Washington is dominated by several large
banking institutions, including U.S. Bank, Wells Fargo Bank, Bank of America,
and JPMorgan Chase Bank, which together account for a majority of the total
commercial and savings bank loans and deposits in Oregon and Washington. These
competitors have significantly greater financial resources and offer a greater
number of branch locations, higher lending limits, and a variety of services not
offered by the Bank. The Bank has attempted to offset some of the advantages of
the larger competitors by leveraging technology and third party arrangements to
deliver contemporary product solutions and better compete in targeted customer
segments. The Bank has positioned itself successfully as a local alternative to
banking conglomerates that may be perceived by customers or potential customers
to be impersonal, out-of-touch with the community, or simply not interested in
providing banking products and services to some of the Bank’s target
customers.
In addition to larger institutions, numerous “community” banks and credit
unions operate in the Bank’s market areas. As a result of very weak real estate
market conditions over the past few years, a number of banks and credit unions
have developed a similar focus as the Bank. These institutions have further
increased competition, particularly in the Portland metropolitan area.
Additionally, a heightened focus by larger institutions on Bancorp’s target
market segments, such as small businesses, has led to intensified competition in
all aspects of Bancorp’s business.
The financial services industry has experienced widespread consolidation
over the last decade. Bancorp anticipates that consolidation among financial
institutions in its market areas will continue and perhaps accelerate as a
result of financial distress in the industry, intensified competition for the
same customer segments, and significantly increased regulatory burdens and rules
that are expected to increase expenses and put pressure on revenues.
6
Supervision and Regulation
Bancorp is an
Oregon corporation headquartered in Lake Oswego, Oregon, and is registered with
the Federal Reserve Bank of San Francisco (“Federal Reserve”) as a bank holding
company. The Bank is an Oregon state bank and is not a member of the Federal
Reserve System. The Bank’s primary regulators are the FDIC at the federal level
and, at the state level, the Oregon Department of Consumer and Business Services
Division of Finance and Corporate Securities (“DFCS”).
The laws and regulations applicable to Bancorp and its subsidiaries are
primarily intended to protect borrowers and depositors of the Bank and not
stockholders of Bancorp. Various proposals to change the laws and regulations
governing the banking industry are made from time to time and presented to
Congress, state legislatures and various bank regulatory agencies. As a result
of the Dodd-Frank Act (as defined below), the creation of the Consumer Financial
Protection Bureau and the current economic climate and regulatory environment,
there is a high likelihood of enactment of new banking legislation and
promulgation of new banking regulations. The following is a brief description of
the significant laws and regulations that govern our activities.
Bank Holding Company Regulation
As a registered bank holding company, Bancorp is subject to the
supervision of, and regular inspection by, the Federal Reserve pursuant to the
Bank Holding Company Act of 1956, as amended (the “BHCA”). In addition, pursuant
to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank
Act”) and subject to certain conditions, the FDIC has backup enforcement
authority over bank holding companies, such as Bancorp, if the conduct or
threatened conduct of the bank holding company poses a risk to the Deposit
Insurance Fund. Bancorp must file reports with the Federal Reserve and must
provide it with such additional information as it may require. The BHCA
restricts the direct and indirect activities of Bancorp to banking, managing or
controlling banks and other subsidiaries authorized under the BHCA, and
activities that are closely related to banking or managing or controlling banks.
Bank holding companies like Bancorp must, among other things, obtain prior
Federal Reserve approval before they: (1) acquire direct or indirect ownership
or control of any voting shares of any bank or bank holding company that results
in total ownership or control, directly or indirectly, of more than 5% of the
outstanding shares of any class of voting securities of such bank or bank
holding company; (2) merge or consolidate with another bank holding company; or
(3) acquire substantially all of the assets of another bank or bank holding
company.
Bank holding companies must also act as a source of financial and
managerial strength to subsidiary banks. This means that Bancorp is required to
commit, as necessary, resources to support the Bank.
Subsidiary banks of a bank holding company are subject to certain other
restrictions under the Federal Reserve Act and Regulation W which restricts
transactions with affiliates. These restrictions may limit Bancorp’s ability to
obtain funds from the Bank for Bancorp’s cash needs, including funds for payment
of interest on its junior subordinated debentures, cash dividends and
operational expenses.
7
Bank
Regulation
General.
The Bank is an
Oregon state bank and is not a member of the Federal Reserve System. The Bank
conducts banking business in Oregon and Washington. The Bank is subject to
supervision and regulation by the DFCS, the FDIC and to a lesser extent, the
Washington Department of Financial Institutions. The Bank's regulators conduct
regular examinations of the Bank and have the authority to prohibit the Bank
from engaging in unsafe or unsound banking practices.
Deposit Insurance.
Generally, eligible deposits maintained at the Bank are insured by the
FDIC up to $250,000 per account. The Bank is required to pay quarterly deposit
insurance premiums to the FDIC. Premiums are based on an assessment of how much
risk a particular institution presents to the Deposit Insurance Fund. Banks with
higher levels of capital and a low degree of supervisory concern are assessed
lower premiums than banks with lower levels of capital or a higher degree of
supervisory concern. The FDIC may terminate deposit insurance if it determines
the institution involved has engaged in or is engaging in unsafe or unsound
banking practices, is in unsafe or unsound condition, or has violated applicable
laws, regulations or orders.
Community Reinvestment Act and Fair Lending and Reporting
Requirements.
The Bank is subject to the
Community Reinvestment Act of 1977, as amended (“CRA”), and to certain fair
lending and reporting requirements that relate primarily to home mortgage
lending operations. The CRA generally requires the federal banking agencies to
evaluate the record of a financial institution in meeting the credit needs of
its local communities, including low- and moderate-income neighborhoods,
consistent with the safe and sound operation of the institution. The federal
banking agencies may take into account compliance with the CRA when regulating
and supervising other activities, such as evaluating mergers, acquisitions and
applications to open a branch or facility. In connection with its assessment of
CRA performance, the FDIC assigns a rating of “outstanding,” “satisfactory,”
“needs to improve” or “substantial noncompliance.” The Bank’s most recent CRA
rating, based on an examination in August 2012, was satisfactory. There are
several rules and regulations governing fair lending and reporting practices by
financial institutions. A bank may be subject to substantial damages, penalties
and corrective measures for any violation of fair lending and reporting,
including credit reporting, laws and regulations.
Consumer Privacy and Information Security.
Financial institutions, such as the Bank, are required by
statute and regulation to disclose their privacy policies. In addition, we must
appropriately safeguard our customers’ nonpublic, personal
information.
Consumer Financial Protection Bureau
. The Dodd-Frank Act, signed into law by the President on July
21, 2010, among other things, created a new Consumer Financial Protection Bureau
(“CFPB”). As required by the Dodd-Frank Act, jurisdiction for all existing
consumer protection laws and regulations has been transferred to the CFPB. In
addition, the CFPB is granted authority to promulgate new consumer protection
regulations for banks and nonbank financial firms offering consumer financial
services or products to ensure that consumer are protected from “unfair,
deceptive, or abusive” acts or practices. The CFPB has begun conducting studies
of existing consumer protection regulations to gauge their effectiveness and to
solicit comment on potential new regulations.
Non-Capital Safety and Soundness Standards.
The Federal Reserve and the FDIC have prescribed, by
regulation, non-capital safety and soundness standards for institutions under
their authority. These standards cover internal controls, information systems
and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, fees and benefits, and other
operational and managerial standards as the agency determines to be appropriate,
and standards for asset quality, earnings and stock valuation. An institution
that fails to meet these standards must develop a plan acceptable to the agency,
specifying the steps it will take to meet the standards. Failure to submit a
plan may subject the institution to regulatory sanctions. We believe the Bank is
in compliance with these standards.
8
Capital Adequacy Requirements
Federal bank
regulatory agencies use capital adequacy guidelines in the examination and
regulation of bank holding companies and banks. If capital falls below minimum
levels, the bank holding company or bank may, among other things, be denied
approval to acquire or establish additional banks or non-bank businesses or to
open new facilities.
The FDIC and Federal Reserve use risk-based capital guidelines for banks
and bank holding companies. Risk-based guidelines are designed to make capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off balance sheet exposure and to minimize
disincentives for holding liquid low-risk assets. Assets and off balance sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off balance sheet items.
The guidelines are minimums and the Federal Reserve may require that a
banking organization maintain ratios in excess of the minimums, particularly
organizations contemplating significant expansion. Current guidelines require
all bank holding companies and federally-regulated banks to maintain a minimum
risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1
capital. Tier 1 capital for bank holding companies includes common stockholders’
equity, qualifying preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, minus certain deductions, including goodwill,
mortgage servicing assets, other identifiable intangible assets, and deferred
tax assets subject to a disallowance.
The Federal Reserve also monitors a leverage ratio, which is Tier 1
capital as a percentage of total quarterly average tangible assets. The
principal objective of the leverage ratio is to constrain the degree to which a
bank holding company may leverage its equity capital base. The Federal Reserve
requires a minimum leverage ratio of 3%.
For more information regarding the Bank and Bancorp’s capital and
leverage ratios, see the discussion under the section “Capital Resources” in
Item 7 of this report. For more information regarding regulatory enforcement
actions that increase minimum ratios applicable to Bancorp and the Bank, see the
discussion under the subheading “Status of Regulatory Actions” in this section
below.
The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”),
among other things, created a statutory framework of supervisory actions indexed
to the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories - well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized - depending on its total
risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio,
together with certain subjective factors including, but not limited to an
overall assessment of profitability, liquidity, interest rate sensitivity, and
the level and severity, especially relative to capital, of nonperforming and
classified assets. Undercapitalized, significantly undercapitalized, and
critically undercapitalized banks are subject to certain mandatory supervisory
corrective actions.
Dividends
Substantially all of our activities are conducted through the Bank.
Consequently, as the parent company of the Bank, the Company receives
substantially all of its revenue as dividends from the Bank. The banking
regulators may prohibit banks and bank holding companies from paying dividends
that would constitute an unsafe or unsound banking practice. In addition, a bank
may not pay cash dividends if doing so would reduce the amount of its capital
below that necessary to meet minimum applicable regulatory capital requirements.
Oregon law also limits a bank's ability to pay dividends.
As of June 27, 2012, the Written Agreement between Bancorp and the
Federal Reserve and the DFCS was terminated. The termination of this agreement
ends certain restrictions on Bancorp, 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 it and seek a
non-objection notice ahead of declaring and paying cash dividends to
shareholders. For more information regarding regulatory actions, see the
discussion under the subheading “Status of Regulatory Actions” in this section
below.
9
Other Laws
and Regulations
Interstate Banking and Branching.
Subject to certain restrictions, adequately capitalized and managed bank
holding companies may purchase banks in any state, and adequately capitalized
and managed banks may merge with banks in other states or otherwise expand
across state lines. Bank regulators are required to consult with community
organizations before permitting an interstate institution to close a branch in a
low income area.
Monetary and Fiscal Policy Effects on Interest Rates.
Banking is a business which depends on
interest rate differentials. In general, the major portion of a bank’s earnings
derives from the differences between: (i) interest received by a bank on loans
extended to its customers and the yield on securities held in its investment
portfolio; and (ii) the interest paid by a bank on its deposits and its other
borrowings (the bank’s “cost of funds.”) Thus, our earnings and growth are
constantly subject to the influence of economic conditions generally, both
domestic and foreign, and also to the monetary, fiscal and related policies of
the United States and its agencies, particularly the Federal Reserve and the
U.S. Treasury. The nature and timing of changes in such policies and their
impact cannot be predicted.
The Volcker Rule.
The
Dodd-Frank Act implements the "Volcker Rule,” which prohibits “banking entities”
such as Bancorp and the Bank from engaging in certain short-term proprietary
trading activities and investments. Transactions in certain instruments,
including obligations of the U.S. Government or a U.S. Government agency,
government-sponsored enterprises, and state and local governments will be exempt
from the prohibitions. The Volcker Rule also prohibits Bancorp and the Bank from
owning, sponsoring, or having certain relationships with any hedge funds or
private equity funds subject to certain exemptions. The prohibitions and
restrictions of the Volcker Rule will not take effect until after publication of
final interagency rules implementing the Volcker Rule.
Overdraft Programs.
The
Electronic Funds Transfer Act (the “EFTA”) provides a basic framework for
establishing the rights, liabilities, and responsibilities of consumers who use
electronic funds transfer (“EFT”) systems. The EFTA is implemented by the
Federal Reserve's Regulation E, which governs transfers initiated through ATMs,
point-of-sale terminals, payroll cards, automated clearinghouse (“ACH”)
transactions, telephone bill-payment plans, or remote banking services.
Regulation E requires consumers to opt in (affirmatively consent) to
participation in the Bank's overdraft service program for ATM and one-time debit
card transactions before overdraft fees may be assessed on the consumer’s
account. Notice of the opt-in right must be provided to all new customers who
are consumers, and the customer's affirmative consent must be obtained, before
charges may be assessed on the consumer's account for paying such
overdrafts.
Regulation E also provide bank customers with an ongoing right to revoke
consent to participation in an overdraft service program for ATM and one-time
debit card transactions and prohibits banks from conditioning the payment of
overdrafts for checks, ACH transactions, or other types of transactions that
overdraw the consumer's account on the consumer's opting into an overdraft
service for ATM and one-time debit card transactions. For customers who do not
affirmatively consent to overdraft service for ATM and one-time debit card
transactions, a bank must provide those customers with the same account terms,
conditions, and features that it provides to consumers who do affirmatively
consent, except for the overdraft service for ATM and one-time debit card
transactions.
Regulation E may have a substantial negative impact on the Bank's
revenue from overdraft service fees and non-sufficient funds (“NSF”) charges if
customers elect to not opt-in or subsequently elect to opt-out. For more
information regarding risks facing Bancorp and the Bank, see the discussion
under the section “Risk Factors” in Item 1A of this report.
Agreement and Plan of Merger
On September 25, 2012, Bancorp entered
into the Merger Agreement. Under the terms of the Merger Agreement 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 (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 the 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
the 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.
10
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 party’s 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.
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.
Status of Regulatory Actions
Regulatory Order.
As of
February 19, 2013, the regulatory order (the “Order”) between the Bank and the
FDIC was terminated. On October 18, 2011, the Bank received the Order from the
FDIC relating to its overdraft practices. As part of the Order, the Bank agreed
to implement certain procedural improvements relating to its compliance function
and overdraft program, pay a civil money penalty of $390,000, and make
restitution to certain customers in accordance with the formula set out in the
Order of approximately $246,000.
Bank Memorandum of Understanding
. On November 29, 2012, the Memorandum of Understanding (“MOU”) between
the Bank, the FDIC and DFCS was terminated. The MOU required that during the
life of the MOU the Bank may not pay dividends without the written consent of
the FDIC and DFCS and that the Bank maintain higher levels of capital than
required by published capital adequacy requirements.
Holding Company Written Agreement.
As of June 27, 2012, the Written Agreement between Bancorp and
the Federal Reserve and the DFCS was terminated. The Federal Reserve continues
to require that we inform and consult with it and seek a non-objection notice
ahead of declaring and paying cash dividends to shareholders. Bancorp received
such non-objection notices in conjunction with the $.05 per share shareholder
cash dividends declared by its Board of Directors on September 25, 2012, and
December 11, 2012, and paid in October 2012 and January 2013,
respectively.
11
ITEM
1A.
RISK
FACTORS
The following
are all material risks that management believes are specific to our business, in
no particular order of likelihood or significance.
Future loan losses may exceed our allowance for credit losses.
We are subject to credit risk, which is the risk that borrowers will fail
to repay loans in accordance with their terms. We maintain an allowance for
credit losses that represents management’s best estimate, as of a particular
date, of the probable amount of loan receivables and unfunded commitments that
the Bank will be unable to collect. The process we use to estimate losses
inherent in our loan portfolio involves difficult, subjective, and complex
judgments, including forecasts of economic conditions and how these economic
forecasts might affect the ability of our borrowers to repay their loans. These
matters are inherently uncertain, which may, in turn, impact the reliability of
estimates. In addition, if our estimates prove to be inaccurate and economic
conditions are significantly less favorable than expected or we experience a
rapid change in interest rates, our borrowers’ ability to repay loans could be
adversely affected. Developments of this nature could result in losses in excess
of our allowance for credit losses. If we determine that it is appropriate to
increase the allowance for credit losses to address changing conditions, we will
do so through additional provision for credit losses. Any additional provision
for credit losses results in a decrease in net income and may have a material
adverse effect on our financial condition, results of operations and regulatory
capital position. For more information regarding the Company’s allowance for
credit losses, see the discussion under the subheading “Allowance for Credit
Losses” and “Critical Accounting Policies” included in Item 7 of this report.
A large percentage of our loan portfolio is secured by real
estate. As a result, we are particularly vulnerable to continued deterioration
in the real estate market in our market areas and other effects.
Approximately 82% of our loan portfolio is secured by real estate. As a
result, we are vulnerable to declines in real estate values in the markets in
which we operate. We have experienced challenging market conditions over the
last four years and high levels of net charge-offs and provision for credit
losses as a result. While net charge-offs and provision for credit losses have
declined significantly, if we experience increases in delinquencies with respect
to commercial real estate or other real estate related loans, or declines in
real estate market values, we would expect increased loan charge-offs and
additional provision for credit losses, which could have a material adverse
effect on our business, financial condition and results of operations. Because
of our significant concentration in loans secured by real estate, we are
particularly vulnerable to such effects.
The recession has been particularly severe in the market areas we
serve and our results of operations may be adversely affected if the local
economies do not improve.
Substantially all of our loans and loan opportunities are to businesses
and individuals in our markets in Washington and Oregon. As evidenced by the
unemployment rate in Oregon, which remained elevated at 8.4% in December 2012,
our region has been severely impacted by the same challenges facing the economy
nationally and perhaps more so. The region also experienced severe declines in
residential and commercial real estate values between 2008 and 2012, before
stabilizing recently. If economic conditions deteriorate or economic recovery in
our market areas stalls, we could face the following consequences, any of which
could materially and adversely affect our business: the value of assets that
serve as collateral for our loans, especially real estate, may decline; loan
delinquencies, foreclosures and losses on loans and other real estate owned
properties (“OREO”) could increase; demand for our products and services may
fail to accelerate or even decrease; and access to low cost or non-interest
bearing deposits may decrease.
Financial services legislation and regulatory reforms may have a
significant impact on our businesses and results of operations.
Many of the provisions of the Dodd-Frank Act have extended implementation
periods and delayed effective dates and require extensive rulemaking by
regulatory authorities and multiple additional studies. The implementation of
Dodd-Frank, including regulatory rules and regulations and related
interpretations of those rules, could result in a number of adverse impacts on
us. The levels of capital and liquidity that Bancorp and the Bank must maintain
to operate may be increased, resulting in decreased leverage and reduced
earnings. We may also be subjected to new and/or higher fees to various
regulatory entities, including but not limited to deposit insurance premiums to
the FDIC. The Bank may also be subject to additional regulations under the newly
established CFPB which has been given broad authority to implement new consumer
protection regulations. These and other provisions of Dodd-Frank could limit our
ability to pursue business opportunities we might otherwise consider, impose
additional costs on us, result in significant loss of revenue, impact the value
of assets we hold, or otherwise significantly adversely affect our
businesses.
12
Congressional and regulatory
initiatives could have an adverse effect on our business.
Federal and
state legislators and regulators continue to pursue increased regulation of how
loans are originated, purchased, and sold, and properties are foreclosed. These
legislative and regulatory responses may impact how the Bank conducts business,
makes and underwrites loans, and buys and sells loans in secondary markets, or
lead to changes in the banking industry, lending markets and secondary markets
for loans generally. We are unable to predict which legislative or regulatory
initiatives will be implemented or what form they will take. Any such actions
could affect us in substantial and unpredictable ways and could have an adverse
effect on our business, financial condition and results of operations. For more
information regarding the regulatory environment in which we operate, see the
discussion under the subheading “Supervision and Regulation” included in Item 1
of this report.
Significant legal and regulatory
actions could subject us to uninsured liabilities, associated reputational risk,
and reduced revenues.
From time to time, we are sued for damages or threatened with lawsuits
relating to various aspects of our operations. We may also be subject to
investigations and possibly substantial civil money penalties assessed by, or
other actions of, federal or state regulators in connection with violations or
alleged violations of applicable laws, regulations or standards. We may incur
substantial attorney fees and expenses in the process of defending against
lawsuits or regulatory actions and our insurance policies may not cover, or
cover inadequately, the costs of adverse judgments, civil money penalties, and
attorney fees and expenses. As a result, we may be exposed to substantial
uninsured liabilities, which could adversely affect our results of operations,
financial condition, and regulatory capital. We are subject to reputational
risk, which is the potential that negative publicity regarding our business
practices, whether true or not, could cause a decline in our customer base,
stock price, or general reputation in the markets in which we operate.
Reputational risk is heightened in the instance of publicity surrounding
lawsuits or regulatory actions.
Rapidly changing interest rates or
prolonged low market interest rates could reduce our net interest margin, net
interest income, and net income.
Interest and fees on loans
and investment securities, net of interest paid on deposits and borrowings, are
the principal source of our revenues and thus an important driver of net income.
Market interest rates and rate changes influence our net interest margin and are
subject to many factors beyond our control. As market interest rates change, net
interest income is affected. Increasing rates could also lead to decreased
demand for loans, deposits, and other products that are priced based on interest
rates. For example, rapid increases in interest rates could result in our
interest expense increasing faster than interest income because of mismatches in
financial instrument maturities. Additionally, extended periods of low market
interest rates, such as we have today, may adversely affect our net interest
spread and net interest income, because our earning assets yield decreases and
stays low during a time that our cost of interest bearing liabilities is already
low and cannot be correspondingly reduced further.
For more information regarding
interest rates, see the discussion under the section “Quantitative and
Qualitative Disclosures about Market Risk” in the Item 7A of this report.
We face liquidity risks in the
operation of our business.
Liquidity is crucial to the operation of Bancorp and the Bank. Liquidity
risk is the potential that Bancorp or the Bank will be unable to fund increases
in assets or meet payment obligations, including obligations to the Bank’s
depositors, as they become due because of an inability to obtain adequate
funding or liquidate assets at a reasonable cost. Funding illiquidity may arise
at the Bank if we are unable to, at reasonable terms, attract and retain
deposits, secure or renew borrowings from the overnight inter-bank market, the
Federal Home Loan Bank of Seattle (the “FHLB”), or the Federal Reserve discount
window, or access other sources of liquidity, as described in more detail under
the heading “Liquidity and Sources of Funds” in Item 7 of this report. If we
fail to monitor and control our liquidity risks, there may be materially adverse
effects on our results of operations and financial condition.
We face operational risks that may
result in unexpected losses.
We face various operational risks that arise from the potential that
inadequate information systems, operational problems, failures in internal
controls, breaches of our security systems, fraud, the execution of unauthorized
transactions by employees, or any number of other unforeseen events could result
in unexpected losses. Additionally, third party vendors provide key components
of our business infrastructure such as internet connections, network access,
data reporting, and data processing. Any problems caused by third parties could
adversely affect our ability to deliver products and services to our customers,
with related adverse affects on our revenues, expenses, and earnings. Replacing
third party vendors, should that be necessary, may entail significant delay and
expense.
13
Our information systems may
experience an interruption or breach in security.
The Bank
relies on its computer information systems in the conduct of its business. The
Bank has policies and procedures in place to protect against and reduce the
occurrences of failures, interruptions, or breaches of security of these
systems, however, there can be no assurance that these policies and procedures
will eliminate the occurrence of failures, interruptions or breaches of security
or that they will adequately restore or minimize any such events. The occurrence
of a failure, interruption or breach of security of the Bank's computer
information systems could result in a loss of information, business or
regulatory scrutiny, or other events, any of which could have a material adverse
effect on our financial condition or results of operations.
The financial services industry is
very competitive and any failure to develop, implement, and distribute
competitive products to generate profitable revenue sources could affect our net
income.
We face competition in attracting and retaining deposits, making, and
retaining loans and providing other financial services. Our competitors include
other community banks, larger banking institutions, and a wide range of other
financial institutions, such as credit unions, government-sponsored enterprises,
mutual fund companies, insurance companies and other non-bank businesses. Many
of these competitors have substantially greater resources than we do. The
challenging real estate market conditions and modest loan demand over the past
few years have caused intense pricing pressures for loans to qualified
borrowers, which impacts the spreads we obtain on loans. For a more complete
discussion of our competitive environment, see the discussion under the heading
“Competition” included in Item 1 of this report. If we are unable to compete
effectively, we will lose market share and income from loans and other products
may be reduced.
Inability to hire or retain key
professionals, management, and staff could adversely affect our revenues and net
income.
We rely on key
personnel to manage and operate our business, including, but not limited to,
major revenue generating functions such as our loan and deposit portfolios. The
loss of key staff may adversely affect our ability to maintain and manage these
portfolios effectively, which could negatively affect our revenues and
earnings.
Market and other constraints on our
loan origination volumes may lead to continued pressure on our interest and fee
income.
Due to the continued weak economic conditions in the markets in which we
operate and other factors, we expect continued pressure on new loan origination
volumes in the near term, particularly with respect to construction loans,
relative to such volumes generated in the pre-recession period. If we are unable
to increase loan volumes, there will be continued pressure on our interest
income and fees generated from our lending operations. Unless we are able to
offset the lower interest income and fees with increased activity in other areas
of our operations, our total revenues may decline relative to our total
noninterest expenses. We expect that it may be difficult to find new revenue
sources in the near term.
Our products and services are
delivered on a technological platform that is subject to rapid change and
transformation.
The financial services industry is
undergoing rapid technological change and we face constant evolution of customer
demand for technology-driven financial and banking products and services,
including mobile banking applications. Many of our competitors have
substantially greater resources to invest in technological improvement and
product development, marketing, and implementation. Any failure to successfully
keep pace with and fund technological innovation in the markets in which we
compete could have a material adverse impact on our business and results of
operations.
Our Common Stock trades in
relatively limited volumes and a significant percentage continues to be owned by
investors in the October 2009 Private Capital Raise, which may result in a share
price that is volatile and which may be subject to downward pricing pressure in
the event significant shareholders decide to dispose of shares of our Common
Stock.
Our Common Stock trades on the NASDAQ Global Select Market under the
symbol “WCBO" and trading volume is modest. The limited trading market for our
Common Stock may lead to exaggerated fluctuations in market prices and possible
market inefficiencies, as compared to a more actively traded stock. It may also
make it more difficult to dispose of our shares at expected prices, especially
for holders seeking to dispose of a large number of our shares. In addition, if
a large shareholder or group of investors in our Private Capital Raise elects to
sell their shares, such sales or attempted sales could result in significant
downward pressure on the market price of our Common Stock and actual price
declines.
Natural disasters could affect our
ability to operate.
Our market areas are located in earthquake zones and our coastal markets
are located in areas that are susceptible to tsunamis. Natural disasters can
disrupt our operations, result in damage to our market areas and negatively
affect the local economies in which we operate. We cannot predict whether or to
what extent damage caused by future earthquakes or tsunamis will affect our
operations or the economies in our market areas, but such events could result in
an inability to continue business operations or cause a decline in loan
originations, a decline in the value or destruction of properties securing our
loans and an increase in the risk of delinquencies, foreclosures or loan
losses.
14
The anticipated benefits of the
Merger may not be realized.
The success of
the Merger will depend, in part, on Columbia’s 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, and in turn may cause
the price of Columbia’s common stock to fall. 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
Bancorp’s 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, including, among others, certain changes in
the recommendation of Bancorp’s board of directors, a failure of Bancorp’s
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.
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 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 DFCS 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 will 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 Bancorp’s 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 operation 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 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 and integration of the
combined operations of Bancorp and Columbia 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.
15
ITEM
1B.
UNRESOLVED STAFF
COMMENTS
None.
ITEM
2.
PROPERTIES
The principal
properties owned by the Bank include a 40,000-square-foot office and branch
facility in downtown Salem, Oregon, a 15,600-square-foot office and branch
facility in Newport, Oregon, and a 12,000-square-foot branch and office facility
in Lacey, Washington. In total, the Bank owns 26 buildings, primarily to house
branch offices. The Bank leases the land under seven buildings and owns the land
under 19 buildings. In addition, the Bank leases 39 office spaces and buildings
for branch locations.
Other non-branch office facilities are located in leased office space,
including our headquarters office in Lake Oswego, Oregon, office and processing
space in Salem, Oregon, where the Bank’s data center is located, space in
Wilsonville, Oregon, where its loan servicing and operations center is located,
space in Vancouver, Washington, and Lake Oswego, Oregon, where we have lending
personnel and a branch office, and space in downtown Portland, where we have
commercial banking personnel, West Coast Investment Services and West Coast
Trust. In addition, we lease two smaller office spaces for lending personnel in
Tukwila and Tacoma, Washington.
The aggregate monthly rental on 46 leased properties is approximately
$368,000.
ITEM
3.
LEGAL
PROCEEDINGS
On June 24, 2009, West Coast Trust was served with an Objection to
Personal Representative's Petition and Petition for Surcharge of Personal
Representative in Linn County Circuit Court. The petition was filed by the
beneficiaries of the estate of Archie Q. Adams, for which West Coast Trust acts
as the personal representative. The petitioners allege a breach of fiduciary
duty with respect to West Coast Trust's prior sale of real property owned by the
Adams estate and sought relief in the form of a surcharge to West Coast Trust of
$215,573,115.60, the amount of the alleged loss to the estate. West Coast Trust
filed a motion to dismiss on July 2, 2009, which was granted in a letter ruling
dated September 15, 2009. Petitioners appealed and briefs have been filed.
Appeals Court oral arguments were heard on November, 2012, and the Company has
not yet received the Appeals Court decision. 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 Bancorp’s board of directors,
and Columbia. The complaint alleges that the Bancorp directors breached their
fiduciary duties to Bancorp and Bancorp’s 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. Thereafter, on October 23, 2012, a second lawsuit challenging
the Merger was filed in the Circuit Court of the State of Oregon for Clackamas
County: Leoni v. West Coast Bancorp et al., Case No. CV12100728. On December 11,
2012, the parties filed a stipulation and proposed order consolidating the two
lawsuits for all purposes in the Circuit Court of the State of Oregon for
Multnomah County, under the caption
In
re
West Coast Bancorp Shareholder Litigation,
Lead Case No. 1210-12431.
While Bancorp believes that the claims in both complaints are without
merit, Bancorp agreed, in order to avoid the expense and burden of continued
litigation and pursuant to the terms of the proposed settlement, to make in the
joint proxy statement/prospectus concerning the proposed Merger certain
supplemental disclosures related to the proposed Merger. Accordingly, on
December 27, 2012, Bancorp and the other defendants in the two actions entered
into a memorandum of understanding to settle both actions. The memorandum of
understanding contemplates that the parties will enter into a stipulation of
settlement. The stipulation of settlement will be subject to customary
conditions, including court approval following notice to Bancorp’s stockholders.
In the event that the parties enter into a stipulation of settlement, a hearing
will be scheduled at which the Circuit Court of the State of Oregon for
Multnomah County will consider the fairness, reasonableness, and adequacy of the
settlement. If the settlement is finally approved by the court, it will resolve
and release all claims in all actions that were or could have been brought
challenging any aspect of the proposed Merger, the Merger Agreement, and any
disclosure made in connection therewith, pursuant to terms that will be
disclosed to stockholders before final approval of the settlement. There can be
no assurance that the parties will ultimately enter into a stipulation of
settlement or that the Circuit Court of the State of Oregon for Multnomah County
will approve the settlement even if the parties were to enter into such
stipulation. In such event, the proposed settlement as contemplated by the
memorandum of understanding may be terminated.
ITEM
4.
MINE SAFETY
DISCLOSURES
None.
16
PART II
|
ITEM
5.
|
|
MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Stock Price and Dividends
Bancorp Common
Stock trades on the NASDAQ Global Select Market under the symbol “WCBO.” The
high and low closing sale prices per share of our Common Stock for each quarter
during the last two years are shown in the table below, together with dividend
information for each period. The prices below do not include retail mark-ups,
mark-downs or commissions, may not represent actual transactions and are not
adjusted for dividends. As of December 31, 2012, there were approximately 1,600
holders of record of our Common Stock.
|
|
|
2012
|
|
2011
|
|
|
|
Market Price
|
|
Cash Dividend
|
|
Market Price
|
|
Cash Dividend
|
|
|
|
High
|
|
Low
|
|
Declared
|
|
High
|
|
Low
|
|
Declared
|
|
1st Quarter
|
|
$
|
19.60
|
|
$
|
15.77
|
|
$
|
0.00
|
|
$
|
17.90
|
|
$
|
14.55
|
|
$
|
0.00
|
|
2nd Quarter
|
|
$
|
20.15
|
|
$
|
18.17
|
|
$
|
0.00
|
|
$
|
18.25
|
|
$
|
15.00
|
|
$
|
0.00
|
|
3rd Quarter
|
|
$
|
22.52
|
|
$
|
19.13
|
|
$
|
0.05
|
|
$
|
18.03
|
|
$
|
12.96
|
|
$
|
0.00
|
|
4th Quarter
|
|
$
|
22.90
|
|
$
|
21.24
|
|
$
|
0.05
|
|
$
|
16.74
|
|
$
|
13.75
|
|
$
|
0.00
|
Payment of
dividends by Bancorp is limited under federal and Oregon laws and regulations
pertaining to Bancorp’s financial condition. Payment of dividends by the Bank is
also subject to limitation under state and federal banking laws and by actions
of state and federal banking regulators. For more information on this topic, see
the discussion under the section “Supervision and Regulation” included in Item 1
of this report and the section “Liquidity and Sources of Funds” included in Item
7 of this report.
Information regarding securities authorized for issuance under equity
compensation plans is incorporated by reference from Part III, Item 12 of this
report.
Issuer Purchases of Equity
Securities
The following table provides information about purchases of Common Stock
by the Company during the quarter ended December 31, 2012:
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
Maximum Number of Shares
Remaining
|
|
|
|
|
Total Number of Shares
|
|
Average Price
Paid
|
|
Purchased as Part of
Publicly
|
|
at Period End that May Be
Purchased
|
|
Period
|
|
|
Purchased/Cancelled
1
|
|
per Share
|
|
Announced Plans or Programs
2
|
|
Under the Plans or Programs
|
|
10/1/12 - 10/31/12
|
|
|
124
|
|
$
|
21.98
|
|
-
|
|
210,364
|
|
11/1/12 - 11/30/12
|
|
|
-
|
|
$
|
0.00
|
|
-
|
|
210,364
|
|
12/1/12 - 12/31/12
|
|
|
-
|
|
$
|
0.00
|
|
-
|
|
210,364
|
|
Total for quarter
|
|
|
124
|
|
|
|
|
-
|
|
|
|
|
1
|
Shares
repurchased by Bancorp during the quarter include shares repurchased from
employees in connection with cancellation of restricted stock to pay
withholding taxes totaling 124 shares, 0 shares, and 0 shares,
respectively, for the periods indicated. There were no shares repurchased
in the periods indicated pursuant to the Company’s corporate stock
repurchase program publicly announced in July 2000 (the “Repurchase
Program”) and described in footnote 2 below.
|
|
|
2
|
Under
the Repurchase Program, the board of directors originally authorized the
Company to purchase 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 December 31, 2012, of approximately 1.0
million shares. 210,000 shares remain available for repurchase under the
plan. The Company is required to advise and consult with the Federal
Reserve prior to stock
repurchases.
|
17
Five Year Stock Performance Graph
The following
chart compares the yearly percentage change in the cumulative shareholder return
on our Common Stock during the five years ended December 31, 2012, with (1) the
Total Return Index for the NASDAQ Stock Market (U.S. Companies) and (2) the
Total Return Index for NASDAQ Bank Stocks. This comparison assumes $100.00 was
invested on December 31, 2007, in our Common Stock and the comparison groups and
assumes the reinvestment of all cash dividends prior to any tax effect and
retention of all stock dividends. Bancorp’s total cumulative return was -71.9%
over the five year period ended December 31, 2012, compared to -20.3% and 20.4%
for the NASDAQ Bank Stocks and NASDAQ composite, respectively.
|
|
Period
Ended
|
|
Index
|
12/31/07
|
12/31/08
|
12/31/09
|
12/31/10
|
12/31/11
|
12/31/12
|
|
West Coast Bancorp
|
100
|
37.9
|
12.2
|
17.8
|
19.7
|
28.1
|
|
NASDAQ Composite
|
100
|
60.2
|
87.3
|
103.1
|
102.3
|
120.4
|
|
NASDAQ Bank Index
|
100
|
78.8
|
65.9
|
75.1
|
67.2
|
79.7
|
18
ITEM
6.
SELECTED FINANCIAL
DATA
Consolidated Five Year Financial
Data
The following
selected consolidated five year financial data should be read in conjunction
with Bancorp’s audited consolidated financial statements and the related notes
to those statements presented in Item 8 of this report.
|
(Dollars in thousands, except per share
data)
|
|
As of and f
or the year ended D
ecember 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
Interest income
|
|
$
|
91,324
|
|
|
$
|
98,675
|
|
|
$
|
105,576
|
|
|
$
|
112,150
|
|
|
$
|
140,846
|
|
|
Interest expense
|
|
|
4,296
|
|
|
|
17,921
|
|
|
|
22,269
|
|
|
|
33,423
|
|
|
|
48,696
|
|
|
Net interest
income
|
|
|
87,028
|
|
|
|
80,754
|
|
|
|
83,307
|
|
|
|
78,727
|
|
|
|
92,150
|
|
|
Provision (benefit) for credit
losses
|
|
|
(983
|
)
|
|
|
8,133
|
|
|
|
18,652
|
|
|
|
90,057
|
|
|
|
40,367
|
|
|
Net interest income (loss)
after provision for credit losses
|
|
|
88,011
|
|
|
|
72,621
|
|
|
|
64,655
|
|
|
|
(11,330
|
)
|
|
|
51,783
|
|
|
Noninterest income
|
|
|
31,827
|
|
|
|
31,819
|
|
|
|
32,697
|
|
|
|
9,129
|
|
|
|
24,629
|
|
|
Noninterest
expense
|
|
|
84,085
|
|
|
|
90,875
|
|
|
|
90,337
|
|
|
|
108,288
|
|
|
|
90,323
|
|
|
Income (loss) before income taxes
|
|
|
35,753
|
|
|
|
13,565
|
|
|
|
7,015
|
|
|
|
(110,489
|
)
|
|
|
(13,911
|
)
|
|
Provision (benefit) for
income taxes
|
|
|
12,247
|
|
|
|
(20,212
|
)
|
|
|
3,790
|
|
|
|
(19,276
|
)
|
|
|
(7,598
|
)
|
|
Net income (loss)
|
|
$
|
23,506
|
|
|
$
|
33,777
|
|
|
$
|
3,225
|
|
|
$
|
(91,213
|
)
|
|
$
|
(6,313
|
)
|
|
|
|
Net interest income on a
tax equivalent basis
2
|
|
$
|
88,165
|
|
|
$
|
81,870
|
|
|
$
|
84,478
|
|
|
$
|
80,222
|
|
|
$
|
93,901
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
1.15
|
|
|
$
|
1.65
|
|
|
$
|
0.16
|
|
|
$
|
(29.15
|
)
|
|
$
|
(2.05
|
)
|
|
Diluted earnings
(loss) per share
|
|
$
|
1.08
|
|
|
$
|
1.58
|
|
|
$
|
0.16
|
|
|
$
|
(29.15
|
)
|
|
$
|
(2.05
|
)
|
|
Cash
dividends
|
|
$
|
0.10
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0.10
|
|
|
$
|
1.45
|
|
|
Period end book
value per common share
|
|
$
|
16.49
|
|
|
$
|
15.20
|
|
|
$
|
13.04
|
|
|
$
|
35.10
|
|
|
$
|
63.15
|
|
|
Weighted average common shares outstanding
|
|
|
19,086
|
|
|
|
19,007
|
|
|
|
17,460
|
|
|
|
3,102
|
|
|
|
3,094
|
|
|
Weighted average
diluted shares outstanding
|
|
|
20,286
|
|
|
|
19,940
|
|
|
|
18,059
|
|
|
|
3,102
|
|
|
|
3,094
|
|
|
|
|
Total assets
|
|
$
|
2,488,180
|
|
|
$
|
2,429,887
|
|
|
$
|
2,461,059
|
|
|
$
|
2,733,547
|
|
|
$
|
2,516,140
|
|
|
Total deposits
|
|
$
|
1,936,000
|
|
|
$
|
1,915,569
|
|
|
$
|
1,940,522
|
|
|
$
|
2,146,884
|
|
|
$
|
2,024,379
|
|
|
Total long-term
borrowings
|
|
$
|
77,900
|
|
|
$
|
120,000
|
|
|
$
|
168,599
|
|
|
$
|
250,699
|
|
|
$
|
91,059
|
|
|
Total loans, net
|
|
$
|
1,465,481
|
|
|
$
|
1,466,089
|
|
|
$
|
1,496,053
|
|
|
$
|
1,686,352
|
|
|
$
|
2,035,876
|
|
|
Stockholders’
equity
|
|
$
|
339,220
|
|
|
$
|
314,479
|
|
|
$
|
272,560
|
|
|
$
|
249,058
|
|
|
$
|
198,187
|
|
|
Financial ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
assets
|
|
|
0.97
|
%
|
|
|
1.37
|
%
|
|
|
0.13
|
%
|
|
|
-3.49
|
%
|
|
|
-0.25
|
%
|
|
Return
on average equity
|
|
|
7.18
|
%
|
|
|
11.79
|
%
|
|
|
1.21
|
%
|
|
|
-45.66
|
%
|
|
|
-3.06
|
%
|
|
Average equity to
average assets
|
|
|
13.54
|
%
|
|
|
11.64
|
%
|
|
|
10.32
|
%
|
|
|
7.64
|
%
|
|
|
8.04
|
%
|
|
Dividend payout ratio
|
|
|
9.26
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
-0.34
|
%
|
|
|
-70.73
|
%
|
|
Efficiency ratio
1
|
|
|
70.29
|
%
|
|
|
80.44
|
%
|
|
|
78.14
|
%
|
|
|
122.34
|
%
|
|
|
72.79
|
%
|
|
Net
loans to assets
|
|
|
58.90
|
%
|
|
|
60.34
|
%
|
|
|
60.79
|
%
|
|
|
61.69
|
%
|
|
|
80.91
|
%
|
|
Average yields
earned
2
|
|
|
4.06
|
%
|
|
|
4.29
|
%
|
|
|
4.40
|
%
|
|
|
4.71
|
%
|
|
|
5.92
|
%
|
|
Average
rates paid
|
|
|
0.30
|
%
|
|
|
1.15
|
%
|
|
|
1.27
|
%
|
|
|
1.76
|
%
|
|
|
2.60
|
%
|
|
Net interest spread
2
|
|
|
3.76
|
%
|
|
|
3.14
|
%
|
|
|
3.13
|
%
|
|
|
2.95
|
%
|
|
|
3.32
|
%
|
|
Net
interest margin
2
|
|
|
3.87
|
%
|
|
|
3.52
|
%
|
|
|
3.48
|
%
|
|
|
3.33
|
%
|
|
|
3.90
|
%
|
|
Nonperforming assets
to total assets
|
|
|
1.66
|
%
|
|
|
2.94
|
%
|
|
|
4.09
|
%
|
|
|
5.59
|
%
|
|
|
7.86
|
%
|
|
Allowance for loan losses to total loans
|
|
|
1.97
|
%
|
|
|
2.35
|
%
|
|
|
2.62
|
%
|
|
|
2.23
|
%
|
|
|
1.40
|
%
|
|
Allowance for credit
losses to total loans
|
|
|
2.03
|
%
|
|
|
2.40
|
%
|
|
|
2.67
|
%
|
|
|
2.29
|
%
|
|
|
1.45
|
%
|
|
Net
loan charge-offs to average loans
|
|
|
0.32
|
%
|
|
|
0.87
|
%
|
|
|
1.05
|
%
|
|
|
4.21
|
%
|
|
|
3.04
|
%
|
|
Allowance for credit
losses to nonperforming loans
|
|
|
120.86
|
%
|
|
|
88.63
|
%
|
|
|
67.07
|
%
|
|
|
39.68
|
%
|
|
|
23.46
|
%
|
|
Allowance for loan losses to nonperforming loans
|
|
|
117.40
|
%
|
|
|
86.73
|
%
|
|
|
65.68
|
%
|
|
|
38.74
|
%
|
|
|
22.67
|
%
|
|
|
1
|
The
efficiency ratio has been computed as noninterest expense divided by the
sum of net interest income on a tax equivalent basis and noninterest
income excluding gains/losses on sales of securities.
|
|
|
2
|
Interest earned on nontaxable securities has been computed on a 35%
tax equivalent basis.
|
19
Consolidated Quarterly Financial
Data
The following
table presents selected consolidated quarterly financial data for each quarter
of 2011 and 2012. The financial information contained in this table reflects all
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods.
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share
data)
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
Interest income
|
|
$
|
22,424
|
|
|
$
|
22,726
|
|
|
$
|
22,841
|
|
|
$
|
23,333
|
|
|
Interest expense
|
|
|
989
|
|
|
|
1,039
|
|
|
|
1,068
|
|
|
|
1,200
|
|
|
Net interest
income
|
|
|
21,435
|
|
|
|
21,687
|
|
|
|
21,773
|
|
|
|
22,133
|
|
|
Provision (benefit) for credit
losses
|
|
|
13
|
|
|
|
(593
|
)
|
|
|
(492
|
)
|
|
|
89
|
|
|
Noninterest
income
|
|
|
7,274
|
|
|
|
8,172
|
|
|
|
8,494
|
|
|
|
7,887
|
|
|
Noninterest expense
|
|
|
20,277
|
|
|
|
21,307
|
|
|
|
21,476
|
|
|
|
21,025
|
|
|
Income before income
taxes
|
|
|
8,419
|
|
|
|
9,145
|
|
|
|
9,283
|
|
|
|
8,906
|
|
|
Provision for income taxes
|
|
|
2,680
|
|
|
|
3,201
|
|
|
|
3,249
|
|
|
|
3,117
|
|
|
Net income
|
|
$
|
5,739
|
|
|
$
|
5,944
|
|
|
$
|
6,034
|
|
|
$
|
5,789
|
|
|
|
|
Earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
1
|
|
$
|
0.28
|
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
0.28
|
|
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
0.28
|
|
|
$
|
0.27
|
|
|
|
|
Return on average assets
2
|
|
|
0.93
|
%
|
|
|
0.97
|
%
|
|
|
1.01
|
%
|
|
|
0.98
|
%
|
|
Return on average equity
2
|
|
|
6.76
|
%
|
|
|
7.14
|
%
|
|
|
7.50
|
%
|
|
|
7.34
|
%
|
|
|
1
|
Due to averaging of shares, quarterly
earnings per share may not add up to the totals reported for the full
year
|
|
|
2
|
Ratios have been
annualized.
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share
data)
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
Interest income
|
|
$
|
23,932
|
|
|
$
|
24,721
|
|
|
$
|
25,104
|
|
|
$
|
24,918
|
|
|
Interest expense
|
|
|
5,992
|
|
|
|
5,380
|
|
|
|
3,143
|
|
|
|
3,406
|
|
|
Net interest
income
|
|
|
17,940
|
|
|
|
19,341
|
|
|
|
21,961
|
|
|
|
21,512
|
|
|
Provision for credit losses
|
|
|
1,499
|
|
|
|
1,132
|
|
|
|
3,426
|
|
|
|
2,076
|
|
|
Noninterest
income
|
|
|
6,419
|
|
|
|
8,414
|
|
|
|
8,070
|
|
|
|
8,916
|
|
|
Noninterest expense
|
|
|
22,744
|
|
|
|
22,620
|
|
|
|
22,958
|
|
|
|
22,553
|
|
|
Income before income
taxes
|
|
|
116
|
|
|
|
4,003
|
|
|
|
3,647
|
|
|
|
5,799
|
|
|
Provision (benefit) for income
taxes
|
|
|
(17,646
|
)
|
|
|
(2,273
|
)
|
|
|
(987
|
)
|
|
|
694
|
|
|
Net income
|
|
$
|
17,762
|
|
|
$
|
6,276
|
|
|
$
|
4,634
|
|
|
$
|
5,105
|
|
|
|
|
Earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.87
|
|
|
$
|
0.31
|
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
Diluted
|
|
$
|
0.83
|
|
|
$
|
0.29
|
|
|
$
|
0.22
|
|
|
$
|
0.25
|
|
|
|
|
Return on average assets
1
|
|
|
2.88
|
%
|
|
|
1.00
|
%
|
|
|
0.76
|
%
|
|
|
0.84
|
%
|
|
Return on average equity
1
|
|
|
23.68
|
%
|
|
|
8.55
|
%
|
|
|
6.58
|
%
|
|
|
7.56
|
%
|
|
|
1
|
Ratios have been annualized.
|
20
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
The following
discussion should be read in conjunction with the audited consolidated financial
statements and related notes to those statements during the periods included in
the consolidated financial statements of West Coast Bancorp and its subsidiaries
that appear in Item 8 “Financial Statements and Supplementary Data” of this
report. References to “we,” “our” or “us” refer to West Coast Bancorp and its
subsidiaries.
Forward-Looking Statement Disclosure
Statements in this Annual Report of West Coast Bancorp (“Bancorp” or the
“Company”) regarding future events or performance are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995 (the “PSLRA”) and are made pursuant to the safe harbors of the PSLRA.
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 Bancorp’s respective
plans, objectives, expectations and intentions and other statements that are not
historical facts. The Company’s actual results could be quite different from
those expressed or implied by the forward-looking statements. Words such as
“could,” “may,” “should,” “plans,” “believes,” “anticipates,” “estimates,”
“predicts,” “expects,” “projects,” “potential,” or “continue,” or words of
similar meaning, often help identify “forward-looking statements,” which include
any statements that expressly or implicitly predict future events, results, or
performance. These forward-looking statements are based on current beliefs and
expectations of Columbia’s and Bancorp’s managements, and are inherently subject
to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond Columbia’s and Bancorp’s 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 our forward-looking statements include, among others,
risks discussed in Item 1A, “Risk Factors” of this report, risks discussed
elsewhere in the text of this report, as well as the following specific factors:
-
General
economic conditions, whether national or regional, and conditions in real
estate markets, that may hinder our ability to increase lending activities or
have an adverse effect on the demand for our loans and other products, our
credit quality and related levels of nonperforming assets and loan losses, and
the value and salability of the real estate that we own or that is the
collateral for many of our loans;
-
Changing bank regulatory conditions, policies, or
programs, whether arising as new legislation or regulatory initiatives, that
could lead to restrictions on activities of banks, increased costs, price
controls on debit card interchange, or prohibition of certain income producing
activities, or changes in the secondary market for bank loan and other
products;
-
Competitive factors, including competition with
community, regional and national financial institutions, that may lead to
pricing pressures that reduce yields the Bank earns on loans and increase
rates the Bank pays on deposits, the loss of our most valued customers,
defection of key employees or groups of employees, or other
losses;
-
Increasing or decreasing interest rate
environments, including changes in the slope and level of the yield curve,
which may be caused by the Federal Reserve Bank’s public comments about future
direction and level of interest rates, that could lead to decreases in net
interest margin, lower net interest and fee income, including lower gains on
sales of loans, and changes in the value of our investment
securities;
-
Failure to develop, implement, and distribute
competitive and client value added products, that may adversely affect our
ability to generate profitable revenue sources;
-
Changes or failures in technology or third party
vendor relationships in important revenue production or service areas or
increases in required investments in technology that could reduce our
revenues, increase our costs, or lead to disruptions in our
business;
-
The possibility that our proposed Merger with
Columbia (the “Merger”) may not close when expected or at all because required
regulatory, shareholder or other approvals or conditions to the closing of the
Merger are not received or are not satisfied on a timely basis or at
all;
-
Changes in Columbia’s stock price, before closing
of the Merger, including those which result from the financial performance of
Columbia and/or Bancorp prior to closing, or more generally due to broader
stock market movements or the performance of financial companies and peer
group companies;
-
Expected benefits from the Merger may not be fully
realized or may take longer to realize than expected, including as a result of
changes in general economic and market conditions, interest rates, monetary
policy, laws and regulations and their enforcement, and the degree of
competition in the geographic and business areas in which Bancorp
operates;
-
Bancorp’s business may not be integrated into
Columbia’s successfully, or such integration may take longer to accomplish
than expected;
21
-
Operating costs, customer relationship losses and
business disruptions relating to the Merger, including adverse developments in
relationships with employees may be greater than expected;
-
The anticipated growth opportunities and cost
savings from the Merger may not be fully realized or may take longer to
realize than expected; and
-
Management time and effort may be diverted to
resolving merger-related issues.
Furthermore,
forward-looking statements are subject to risks and uncertainties related to the
Company’s ability to, among other things: dispose of properties or other assets
obtained through foreclosures at expected prices and within a reasonable period
of time; attract and retain key personnel; generate loan and deposit balances at
projected spreads; sustain fee generation including gains on sales of loans;
maintain asset quality and control risk; limit the amount of net loan
charge-offs; adapt to changing customer deposit, investment and borrowing
behaviors; control expenses; and monitor and manage its financial reporting,
operating and disclosure control environments.
Readers are cautioned not to place undue reliance on our forward-looking
statements, which reflect management’s analysis only as of the date of the
statements. We do not intend to publicly revise or update forward-looking
statements to reflect events or circumstances that arise after the date of this
report.
Readers should carefully review all disclosures we file from time to time
with the Securities and Exchange Commission (“SEC”).
Overview
2012
Financial Overview
The Company’s operating highlights in 2012 included:
-
Pre-tax income of $35.8 million, which includes
$1.7 million of merger-related expenses, represents an increase of $22.2
million from $13.6 million in 2011;
-
A provision for income taxes of $12.2 million,
compared to a benefit of $20.2 million in 2011 which was largely caused by the
reversal of a significant deferred tax asset valuation allowance in the fourth
quarter of 2011 that was accumulated in prior years;
-
Net income of $23.5 million compared to $33.8
million in 2011, which was impacted by the reversal of the deferred tax asset
valuation allowance;
-
A return on average assets of
.97%;
-
An average rate paid on total deposits of .09%, a
decline from .26% in 2011;
-
A benefit for credit losses of $1.0 million,
compared to a provision for credit losses of $8.1 million in
2011;
-
Net loan charge-offs of $4.7 million, a decline
from $13.2 million in 2011;
-
Net other real estate owned (“OREO”) valuation
adjustments and gains and losses on sales of $2.8 million, a reduction from
$3.2 million in 2011;and
-
Operating noninterest expense, excluding
merger-related charges, of $82.3 million, a 9% reduction from $90.9 million in
2011.
The financial
condition of Bancorp and the Bank continued to strengthen in 2012, as evidenced
by:
-
The Bank’s Total and Tier 1 risk-based capital
ratios increasing to 21.20% and 19.95%, respectively, at December 31, 2012, up
from 19.92% and 18.66% at December 31, 2011;
-
The Bank’s leverage ratio improving to 15.07% at
December 31, 2012, from 14.09% a year ago; and
-
Total nonperforming assets decreasing by
42% or $30.2 million over the past twelve months to $41.2 million at year end
2012.
The Company’s
Board of Directors declared and the Company paid a cash dividend of $.05 per
share common share and $.50 per share of Series B Preferred Stock for third and
fourth quarters 2012, with the fourth quarter dividend paid in January 2013.
Amounts paid 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 dividends
reflected the Company’s strong capital position and continued
profitability.
22
Agreement
and Plan of Merger
On September 25, 2012, Bancorp entered
into an Agreement and Plan of Merger (the “Merger Agreement”) with Columbia
Banking System, Inc., a Washington corporation (“Columbia”). Under the terms of
the Merger Agreement 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 (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 party’s 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.
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 February 19, 2013, the regulatory order (the “Order”) between the
Bank and the FDIC was terminated. On October 18, 2011, the Bank received the
Order from the FDIC relating to its overdraft practices. As part of the Order,
the Bank agreed to implement certain procedural improvements relating to its
compliance function and overdraft program, pay a civil money penalty of
$390,000, and make restitution to certain customers in accordance with the
formula set out in the Order of approximately $246,000.
As of June 27, 2012, the Written Agreement between Bancorp and the
Federal Reserve Bank of San Francisco (“Federal Reserve”) and the Oregon
Department of Consumer and Business Services Division of Finance and Corporate
Securities (“DFCS”) was terminated. The Federal Reserve continues to require
that we inform and consult with it 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
dividends declared by its Board of Directors on September 25, 2012, and December
11, 2012, paid in October 2012 and January 2013.
As of November 29, 2012, the Memorandum of Understanding (“MOU”) between
West Coast Bank, the FDIC and DFCS was also terminated. The MOU required that
during the life of the MOU the Bank would not pay dividends without the written
consent of the FDIC and DFCS and that the Bank maintained higher levels of
capital than required by published capital adequacy requirements.
23
Income Statement
Overview
Our net income
for the full year 2012 was $23.5 million, compared to $33.8 million in 2011 and
$3.2 million in 2010. Earnings per diluted share for the years ended December
31, 2012, 2011, and 2010 were $1.08, $1.58, and $.16, respectively. Return on
average assets was .97% in 2012, a decline from 1.37% in 2011 and an increase
from .13% in 2010. In 2011, net income, earnings per share, and return on assets
benefited materially from the full reversal of the Company’s deferred tax asset
valuation allowance. Our full year 2012 pre-tax income was $35.8 million, or
$37.5 million excluding merger-related expenses of $1.7 million, and represented
an increase of $23.9 million from $13.6 million in 2011. The increase in the
2012 pre-tax income as compared to 2011 pre-tax income was primarily due to an
increase in net interest income and reductions in the provision for credit
losses and noninterest expense. The improved net income in 2011 when compared to
2010 was primarily due to the reversal of the Company’s deferred tax asset
valuation allowance and a reduction in provision for credit losses in 2011
compared to 2010.
Net Interest Income, Average Balances, Yields Earned, and Rates
Paid
. The following table displays
information on net interest income, average yields earned and rates paid, as
well as net interest spread and margin information on a tax equivalent basis for
the periods indicated. The adjustment to a taxable equivalent basis increases
interest income by an estimate of the additional yield that would have been
received by the Company if its tax-exempt securities had been taxable at the
statutory rate. This information can be used to follow the changes in our yields
and rates and the changes in our earning assets and liabilities over the past
three years:
|
(Dollars in thousands)
|
|
Year Ended December 31,
|
|
Increase (Decrease)
|
|
Percentage Change
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
12-11
|
|
11-10
|
|
12-11
|
|
11-10
|
|
Interest and fee income
1
|
|
$
|
92,461
|
|
|
$
|
99,791
|
|
|
$
|
106,747
|
|
|
($7,330
|
)
|
|
($6,956
|
)
|
|
-7.3
|
%
|
|
-6.5
|
%
|
|
Interest expense
|
|
$
|
4,296
|
|
|
$
|
17,921
|
|
|
$
|
22,269
|
|
|
($13,625
|
)
|
|
($4,348
|
)
|
|
-76.0
|
%
|
|
-19.5
|
%
|
|
Net interest income
1
|
|
$
|
88,165
|
|
|
$
|
81,870
|
|
|
$
|
84,478
|
|
|
$6,295
|
|
|
($2,608
|
)
|
|
7.7
|
%
|
|
-3.1
|
%
|
|
|
|
Average interest earning
assets
|
|
$
|
2,277,955
|
|
|
$
|
2,324,016
|
|
|
$
|
2,425,073
|
|
|
($46,061
|
)
|
|
($101,057
|
)
|
|
-2.0
|
%
|
|
-4.2
|
%
|
|
Average interest bearing
liabilities
|
|
$
|
1,420,677
|
|
|
$
|
1,558,434
|
|
|
$
|
1,751,296
|
|
|
($137,757
|
)
|
|
($192,862
|
)
|
|
-8.8
|
%
|
|
-11.0
|
%
|
|
|
|
Average interest earning
assets/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest
bearing liabilities
|
|
|
160.34
|
%
|
|
|
149.13
|
%
|
|
|
138.47
|
%
|
|
11.22
|
%
|
|
10.65
|
%
|
|
|
|
|
|
|
|
Average yield earned
1
|
|
|
4.06
|
%
|
|
|
4.29
|
%
|
|
|
4.40
|
%
|
|
-0.23
|
%
|
|
-0.11
|
%
|
|
|
|
|
|
|
|
Average rate
paid
|
|
|
0.30
|
%
|
|
|
1.15
|
%
|
|
|
1.27
|
%
|
|
-0.85
|
%
|
|
-0.12
|
%
|
|
|
|
|
|
|
|
Net interest spread
1
|
|
|
3.76
|
%
|
|
|
3.14
|
%
|
|
|
3.13
|
%
|
|
0.62
|
%
|
|
0.01
|
%
|
|
|
|
|
|
|
|
Net interest margin
1
|
|
|
3.87
|
%
|
|
|
3.52
|
%
|
|
|
3.48
|
%
|
|
0.35
|
%
|
|
0.04
|
%
|
|
|
|
|
|
|
|
|
1
|
Interest earned on nontaxable securities has been computed on a 35%
tax equivalent basis.
|
Net interest
income on a tax equivalent basis totaled $88.2 million for the year ended
December 31, 2012, an increase of $6.3 million or 7.7% from $81.9 million in
2011. The net interest margin increased 35 basis points to 3.87% in 2012 from
3.52% in 2011. The increase in net interest income and margin from 2011 to 2012
was primarily due to Federal Home Loan Bank of Seattle (the “FHLB”) borrowing
prepayment charges of $7.1 million in 2011 and the resulting benefit in 2012
from refinancing the majority of the FHLB borrowings in 2011 at lower rates.
Excluding the prepayment charge, the net interest margin in 2011 would have been
3.83%. The 2012 net interest income and margin also benefited from lower rates
paid on interest bearing deposits and a continued change in deposit mix to lower
cost demand deposits and the lower volume of FHLB borrowings. The combined
favorable effect from these factors more than offset the impact from lower loan
average balances and lower yields on both loan and investment securities
portfolios in 2012 compared to 2011. In 2010, net interest income on a tax
equivalent basis was $84.5 million and the net interest margin was 3.48%. The
$2.6 million decrease in net interest income from 2010 to 2011 was principally
due to FHLB borrowing prepayment charges of $7.1 million in 2011, an increase
from $2.3 million in 2010. Additionally, the benefits from lower rates paid on
interest bearing deposits, a change in the mix to lower cost demand deposits, as
well as lower cash balances at the Federal Reserve, more than offset lower loan
balances, a significant shift in the Company’s earning assets mix from loan to
investment securities balances, and lower yields on both loan and investment
securities portfolios.
Changing interest rate environments, including the slope, level of, and
changes in the yield curve, competitive pricing pressure, and changing economic
conditions, could lead to higher deposit and borrowing costs, lower loan yields,
reduced net interest margin and spread and lower loan fees, all of which could
lead to additional pressure on our net interest income. For more information
regarding interest rates, see the discussion under the section “Quantitative and
Qualitative Disclosures about Market Risk” in the Item 7A of this report.
As of December 31, 2012, the Bank had $755.4 million in floating and
adjustable rate loans with interest rate floors, with $610.7 million of these
loans at their floor rate. At year end 2011, $729.7 million in floating and
adjustable rate loans had interest rate floors, with $550.9 million at their
floor rate. The floors have benefited the Company’s loan yield and net interest
income and margin over the past few years given the extremely low market
interest rate environment. If interest rates rise, the Company anticipates
yields on loans at floors will initially lag underlying changes in market
interest rates and adversely affect our net interest income and margin, 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.
24
Until our loan
balances begin to expand and become a larger component of our overall earning
assets balance and the volume of non-interest bearing deposit balances increase,
we project continued pressure on the Company’s yield on earning assets and net
interest income and margin.
The following table sets forth, for the periods indicated, information
with regard to (1) average balances of assets and liabilities, (2) the total
dollar amounts of interest income on interest earning assets and interest
expense on interest bearing liabilities, (3) resulting yields and rates, (4) net
interest income and (5) net interest spread. Nonaccrual loans have been included
in the tables as loans carrying a zero yield. Loan fees are recognized as income
using the interest method over the life of the loan.
|
|
|
Year Ended
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Interest
|
|
|
|
|
Average
|
|
Interest
|
|
|
|
|
|
|
Outstanding
|
|
Interest
|
|
Yield/
|
|
Outstanding
|
|
Earned/
|
|
Yield/
|
|
Outstanding
|
|
Earned/
|
|
Yield/
|
|
|
|
Balance
|
|
Earned/Paid
|
|
Rate
1
|
|
Balance
|
|
Paid
|
|
Rate
1
|
|
Balance
|
|
Paid
|
|
Rate
1
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning
balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due from banks
|
|
$
|
43,859
|
|
|
$
|
122
|
|
0.28
|
%
|
|
$
|
67,332
|
|
|
$
|
184
|
|
0.27
|
%
|
|
$
|
188,925
|
|
|
$
|
493
|
|
0.26
|
%
|
|
Federal
funds sold
|
|
|
2,610
|
|
|
|
2
|
|
0.08
|
%
|
|
|
3,796
|
|
|
|
3
|
|
0.08
|
%
|
|
|
6,194
|
|
|
|
6
|
|
0.09
|
%
|
|
Taxable securities
|
|
|
680,047
|
|
|
|
13,949
|
|
2.05
|
%
|
|
|
677,840
|
|
|
|
16,177
|
|
2.39
|
%
|
|
|
547,960
|
|
|
|
14,493
|
|
2.64
|
%
|
|
Nontaxable securities
2
|
|
|
66,185
|
|
|
|
3,249
|
|
4.91
|
%
|
|
|
57,053
|
|
|
|
3,190
|
|
5.59
|
%
|
|
|
58,139
|
|
|
|
3,346
|
|
5.76
|
%
|
|
Loans, including fees
3
|
|
|
1,485,254
|
|
|
|
75,139
|
|
5.06
|
%
|
|
|
1,517,995
|
|
|
|
80,237
|
|
5.29
|
%
|
|
|
1,623,855
|
|
|
|
88,409
|
|
5.44
|
%
|
|
Total interest earning assets
|
|
|
2,277,955
|
|
|
|
92,461
|
|
4.06
|
%
|
|
|
2,324,016
|
|
|
|
99,791
|
|
4.29
|
%
|
|
|
2,425,073
|
|
|
|
106,747
|
|
4.40
|
%
|
|
|
|
Allowance for loan losses
|
|
|
(33,096
|
)
|
|
|
|
|
|
|
|
|
(38,456
|
)
|
|
|
|
|
|
|
|
|
(42,003
|
)
|
|
|
|
|
|
|
|
Premises and
equipment
|
|
|
23,247
|
|
|
|
|
|
|
|
|
|
25,919
|
|
|
|
|
|
|
|
|
|
27,517
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
150,522
|
|
|
|
|
|
|
|
|
|
149,315
|
|
|
|
|
|
|
|
|
|
165,284
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,418,628
|
|
|
|
|
|
|
|
|
$
|
2,460,794
|
|
|
|
|
|
|
|
|
$
|
2,575,871
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
368,284
|
|
|
$
|
128
|
|
0.03
|
%
|
|
$
|
362,334
|
|
|
$
|
226
|
|
0.06
|
%
|
|
$
|
335,134
|
|
|
$
|
447
|
|
0.13
|
%
|
|
Savings
|
|
|
130,365
|
|
|
|
67
|
|
0.05
|
%
|
|
|
112,385
|
|
|
|
125
|
|
0.11
|
%
|
|
|
103,531
|
|
|
|
278
|
|
0.27
|
%
|
|
Money
market
|
|
|
597,376
|
|
|
|
544
|
|
0.09
|
%
|
|
|
654,329
|
|
|
|
1,723
|
|
0.26
|
%
|
|
|
659,542
|
|
|
|
3,939
|
|
0.60
|
%
|
|
Time deposits
|
|
|
147,713
|
|
|
|
1,000
|
|
0.68
|
%
|
|
|
217,149
|
|
|
|
2,899
|
|
1.34
|
%
|
|
|
388,500
|
|
|
|
7,466
|
|
1.92
|
%
|
|
Short-term borrowings
4
|
|
|
14,268
|
|
|
|
115
|
|
0.81
|
%
|
|
|
14,653
|
|
|
|
1,004
|
|
6.85
|
%
|
|
|
7,570
|
|
|
|
494
|
|
6.52
|
%
|
|
Long-term borrowings
4
5
|
|
|
162,671
|
|
|
|
2,442
|
|
1.50
|
%
|
|
|
197,584
|
|
|
|
11,944
|
|
6.05
|
%
|
|
|
257,019
|
|
|
|
9,645
|
|
3.75
|
%
|
|
Total interest bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
|
1,420,677
|
|
|
|
4,296
|
|
0.30
|
%
|
|
|
1,558,434
|
|
|
|
17,921
|
|
1.15
|
%
|
|
|
1,751,296
|
|
|
|
22,269
|
|
1.27
|
%
|
|
Demand deposits
|
|
|
647,323
|
|
|
|
|
|
|
|
|
|
592,630
|
|
|
|
|
|
|
|
|
|
540,280
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
23,108
|
|
|
|
|
|
|
|
|
|
23,332
|
|
|
|
|
|
|
|
|
|
18,486
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,091,108
|
|
|
|
|
|
|
|
|
|
2,174,396
|
|
|
|
|
|
|
|
|
|
2,310,062
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
327,520
|
|
|
|
|
|
|
|
|
|
286,398
|
|
|
|
|
|
|
|
|
|
265,809
|
|
|
|
|
|
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders' equity
|
|
$
|
2,418,628
|
|
|
|
|
|
|
|
|
$
|
2,460,794
|
|
|
|
|
|
|
|
|
$
|
2,575,871
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
88,165
|
|
|
|
|
|
|
|
|
$
|
81,870
|
|
|
|
|
|
|
|
|
$
|
84,478
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
3.76
|
%
|
|
|
|
|
|
|
|
|
3.14
|
%
|
|
|
|
|
|
|
|
|
3.13
|
%
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
3.52
|
%
|
|
|
|
|
|
|
|
|
3.48
|
%
|
|
|
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. The tax equivalent basis
adjustment for the years ended December 31, 2012 and 2011 was $1.1
million, and 2010 was $1.2 million.
|
|
|
3
|
Includes balances of loans held for sale and
nonaccrual loans.
|
|
|
4
|
Includes portion of $7.1 million prepayment fee
in connection with prepaying $168.6 million in FHLB borrowings in the year
2011 and a portion of $2.3 million prepayment fee in connection with
prepaying $99.1 million in FHLB borrowings in the year 2010. The maximum
amount of short-term borrowings held during the year was $50.0 million and
$39.2 million for the years ended December 31, 2012 and 2011,
respectively.
|
|
|
5
|
Includes junior subordinated debentures with
average balance of $51.0 million for 2012, 2011 and
2010.
|
25
Net Interest Income – Changes Due to
Rate and Volume.
The following table sets forth the dollar amounts of the
changes in consolidated net interest income attributable to changes in volume and to changes in interest rates. Changes not
due solely to volume or rate and changes due to new product lines, if any, are allocated to volume.
|
|
|
Year Ended December 31,
|
|
|
|
2012 compared to 2011
|
|
2011 compared to 2010
|
|
|
|
(Dollars in thousands)
|
|
Increase (Decrease) due to:
|
|
Total Increase
|
|
Increase (Decrease) due to:
|
|
Total Increase
|
|
|
|
Volume
|
|
Yield/Rate
|
|
(Decrease)
|
|
Volume
|
|
Yield/Rate
|
|
(Decrease)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning balances due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from banks
|
|
$
|
(64
|
)
|
|
$
|
2
|
|
|
$
|
(62
|
)
|
|
$
|
(317
|
)
|
|
$
|
8
|
|
|
$
|
(309
|
)
|
|
Federal funds sold
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
Investment security income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on taxable securities
|
|
|
79
|
|
|
|
(2,307
|
)
|
|
|
(2,228
|
)
|
|
|
3,903
|
|
|
|
(2,219
|
)
|
|
|
1,684
|
|
|
Interest on
nontaxable securities
1
|
|
|
511
|
|
|
|
(452
|
)
|
|
|
59
|
|
|
|
(63
|
)
|
|
|
(93
|
)
|
|
|
(156
|
)
|
|
Loans, including fees on loans
|
|
|
(1,251
|
)
|
|
|
(3,847
|
)
|
|
|
(5,098
|
)
|
|
|
(4,699
|
)
|
|
|
(3,473
|
)
|
|
|
(8,172
|
)
|
|
Total interest
income
1
|
|
|
(726
|
)
|
|
|
(6,604
|
)
|
|
|
(7,330
|
)
|
|
|
(1,178
|
)
|
|
|
(5,778
|
)
|
|
|
(6,956
|
)
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
|
4
|
|
|
|
(102
|
)
|
|
|
(98
|
)
|
|
|
36
|
|
|
|
(257
|
)
|
|
|
(221
|
)
|
|
Savings
|
|
|
20
|
|
|
|
(78
|
)
|
|
|
(58
|
)
|
|
|
24
|
|
|
|
(177
|
)
|
|
|
(153
|
)
|
|
Money market
|
|
|
(150
|
)
|
|
|
(1,029
|
)
|
|
|
(1,179
|
)
|
|
|
(31
|
)
|
|
|
(2,185
|
)
|
|
|
(2,216
|
)
|
|
Time deposits
|
|
|
(1,068
|
)
|
|
|
(830
|
)
|
|
|
(1,898
|
)
|
|
|
(3,446
|
)
|
|
|
(1,121
|
)
|
|
|
(4,567
|
)
|
|
Short-term borrowings
2
|
|
|
(26
|
)
|
|
|
(863
|
)
|
|
|
(889
|
)
|
|
|
462
|
|
|
|
48
|
|
|
|
510
|
|
|
Long-term borrowings
2 3
|
|
|
(2,111
|
)
|
|
|
(7,392
|
)
|
|
|
(9,503
|
)
|
|
|
(2,231
|
)
|
|
|
4,530
|
|
|
|
2,299
|
|
|
Total interest
expense
|
|
|
(3,331
|
)
|
|
|
(10,294
|
)
|
|
|
(13,625
|
)
|
|
|
(5,186
|
)
|
|
|
838
|
|
|
|
(4,348
|
)
|
|
Increase (decrease) in net interest income
1
|
|
$
|
2,605
|
|
|
$
|
3,690
|
|
|
$
|
6,295
|
|
|
$
|
4,008
|
|
|
$
|
(6,616
|
)
|
|
$
|
(2,608
|
)
|
|
|
1
|
Tax exempt income has been adjusted to a tax-equivalent basis using
a 35% tax equivalent basis.
|
|
|
2
|
Includes portion of $7.1 million prepayment fee in connection with
prepaying $168.6 million in FHLB borrowings in the year 2011. The year
ending 2010 includes a $2.3 million prepayment fee in connection with
prepaying $99.1 million in FHLB borrowings.
|
|
|
3
|
Long-term borrowings include junior subordinated
debentures.
|
For the year ended December 31, 2012, lower loan
balances and yields on loan and investment securities portfolio balances were
the main drivers of the $7.3 million decline in interest income as compared to
2011. However, reduced interest expense in 2012, principally caused by a $7.1
million prepayment fee in 2011 that did not recur in 2012 and lower time deposit
and FHLB borrowing balances in 2012, along with lower rates on interest bearing
deposits and FHLB borrowings more than offset the decline in interest income. As
a result, net interest income increased $6.3 million in 2012 compared to 2011.
Net interest income declined $2.6 million in 2011 compared to 2010. As noted
above, 2011 figures include the $7.1 million charge associated with prepaying
FHLB borrowings in 2011 compared to $2.3 million in such charges in 2010. The
decline in interest income on loans from 2010 to 2011 was partly offset by a
reduction in interest expense on money market and time deposit balances over the
same period.
Provision (Benefit) for Credit
Losses
. The provision for credit losses
is comprised of two primary components, a provision for loan losses related to
outstanding loans and a provision for losses related to unfunded commitments.
The provision for credit losses reflects changes in the credit quality of the
entire loan portfolio. The provision for credit losses is recorded to bring the
allowance for loan losses and the reserve for unfunded commitments to amounts
considered appropriate by management based on factors which are described in the
“Credit Management” and “Allowance for Credit Losses and Net Loan Charge-offs”
sections in this Item 7 of this report.
The benefit for credit losses was $1.0 million for the year ended
December 31, 2012, compared to a provision for credit losses of $8.1 million and
$18.7 million for the years ended December 31, 2011 and 2010, respectively. Net
loan charge-offs were $4.7 million, $13.2 million, and $17.0 million, over those
same years.
The provision for credit losses decreased $9.1 million in 2012 compared
to 2011, primarily due to a significant reduction in unfavorable loan risk
rating migration within the Company’s loan portfolio in 2012 compared to 2011
and lower net loan charge-offs in all loan categories. The $8.1 million
provision for credit losses in 2011 was significantly lower than the $18.7
million provision for credit losses in 2010. The lower provision for credit
losses in 2011 reflected a significant reduction in unfavorable loan risk rating
migration in 2011 and lower net charge-offs within the loan portfolio compared
to 2010.
26
The level of
the Company’s future provisioning will be heavily dependent on the local real
estate market for both residential and commercial properties, general economic
conditions nationally and in the areas in which we do business, and the effects
of any changes in interest rates.
Noninterest Income
. Our
noninterest income for the year ended December 31, 2012, was $31.8 million,
which was substantially unchanged from 2011. Deposit service charges in 2012
declined $1.5 million or 12% from 2011, as we implemented FDIC regulations
requiring that depositors opt in to certain overdraft programs. Payment systems
related revenues decreased $.1 million in 2012 compared to 2011 mainly as a
result of a decrease in number of deposit transaction accounts and associated
cards. Trust and investment service revenue increased 4% or $.2 million in 2012
compared to 2011. In 2012, gains on sales of loans were $2.3 million, up 72%
from $1.3 million for 2011. This increase was primarily due to a higher volume
of sales of SBA loans. The Company recorded net gains on sales of securities of
$.4 million in 2012 compared to $.7 million in 2011. In 2012, OREO valuation
adjustments, which are a component of noninterest income, declined to $3.0
million from $4.8 million in 2011. This $1.8 million decline was primarily due
to a reduction in OREO property balances in 2012 compared to 2011 as well as
stabilization in residential real estate property values within our markets in
2012. Net OREO gains on sales was $.2 million in 2012, a reduction from $1.6
million in 2011. Total noninterest income before the effects of total OREO
losses was $34.6 million in 2012 compared to $35.1 million in 2011.
Our noninterest income for the year ended December 31, 2011, was $31.8
million, which was down $.9 million or 3%, compared to $32.7 million in 2010.
The 2011 decrease predominantly reflected a $2.3 million decrease in deposit
service charges resulting from implementing FDIC regulation of overdraft
programs in second quarter of 2011.
Our ability to increase noninterest income in the future will be
dependent on many factors, including the effects of legislation and related
regulations, pricing changes by the payment card networks, or the possibility of
other regulations limiting bank activities. Our ability to retain and grow
deposit balances, level of interest rates, and the success in developing and
distributing new products could also be impacted by the factors noted above.
Additional OREO valuation adjustments and competitive factors could also
adversely affect our noninterest income.
The following table illustrates the components and change in noninterest
income for the periods shown:
|
(Dollars in thousands)
|
|
Full year
|
|
Full year
|
|
2012 to 2011
|
|
Full year
|
|
2011 to 2010
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
2010
|
|
Change
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$
|
11,816
|
|
|
$
|
13,353
|
|
|
$
|
(1,537
|
)
|
|
$
|
15,690
|
|
|
$
|
(2,337
|
)
|
|
Payment systems related
revenue
|
|
|
12,246
|
|
|
|
12,381
|
|
|
|
(135
|
)
|
|
|
11,393
|
|
|
|
988
|
|
|
Trust
and investment services revenues
|
|
|
4,700
|
|
|
|
4,503
|
|
|
|
197
|
|
|
|
4,267
|
|
|
|
236
|
|
|
Gains on sales of
loans
|
|
|
2,295
|
|
|
|
1,335
|
|
|
|
960
|
|
|
|
1,197
|
|
|
|
138
|
|
|
Other
|
|
|
3,257
|
|
|
|
2,949
|
|
|
|
308
|
|
|
|
3,003
|
|
|
|
(54
|
)
|
|
Other-than-temporary
impairment losses
|
|
|
(49
|
)
|
|
|
(179
|
)
|
|
|
130
|
|
|
|
-
|
|
|
|
(179
|
)
|
|
Gain on
sales of securities, net
|
|
|
375
|
|
|
|
713
|
|
|
|
(338
|
)
|
|
|
1,562
|
|
|
|
(849
|
)
|
|
Total
|
|
|
34,640
|
|
|
|
35,055
|
|
|
|
(415
|
)
|
|
|
37,112
|
|
|
|
(2,057
|
)
|
|
|
|
OREO gains (losses) on
sales, net
|
|
|
194
|
|
|
|
1,596
|
|
|
|
(1,402
|
)
|
|
|
2,234
|
|
|
|
(638
|
)
|
|
OREO
valuation adjustments
|
|
|
(3,007
|
)
|
|
|
(4,832
|
)
|
|
|
1,825
|
|
|
|
(6,649
|
)
|
|
|
1,817
|
|
|
Total
|
|
|
(2,813
|
)
|
|
|
(3,236
|
)
|
|
|
423
|
|
|
|
(4,415
|
)
|
|
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest
income
|
|
$
|
31,827
|
|
|
$
|
31,819
|
|
|
$
|
8
|
|
|
$
|
32,697
|
|
|
$
|
(878
|
)
|
27
Noninterest
Expense.
Total noninterest expense of $84.1
million in 2012, reflects a decrease of $6.8 million, or 8%, from $90.9 million
in 2011. Excluding merger-related expenses of $1.7 million, total noninterest
expense declined $8.5 million or 9% as compared to 2011. Principally as a result
of cost savings initiatives implemented over the past eighteen months, including
seven branch closures in late 2011 and the first part of 2012, noninterest
expense declined in nearly all categories from 2011. Salaries and employee
benefits declined $2.8 million or 6%, primarily reflecting a reduction in number
of employees. Marketing expenses in 2012 decreased $1.4 million principally due
to a reduction in direct mailing campaigns and reduced print advertising. The
$2.1 million decrease in other noninterest expenses in 2012 was attributable, in
part, to a $.9 million decrease in FDIC insurance premium as well as no expense
in 2012 related to cost savings initiatives compared to $1.3 million in 2011.
Noninterest expense in
2011 increased $.6 million, or 1%, from $90.3 million in 2010, primarily due the
$2.7 million increase in salaries and employee benefits expense largely caused
by higher incentive and commission expenses, and $1.3 million in expense related
to cost savings initiatives implemented in 2011. These increases were
substantially offset by lower FDIC expense premiums and OREO expenses in 2011 as
well as an accrual for a contingent liability made in 2010 which was partially
reversed in 2011.
Changing business conditions, increased costs in connection with
retention of key employees, lower loan production volumes causing deferred loan
origination costs to decline, unexpected increases in OREO expenses, or a
failure to manage our operating and control environments could adversely affect
our ability to limit expense growth in the future.
The following table illustrates the components and changes in noninterest
expense for the periods shown:
|
(Dollars in thousands)
|
|
Full year
|
|
Full year
|
|
2012 to 2011
|
|
Full year
|
|
2011 to 2010
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
2010
|
|
Change
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
45,743
|
|
$
|
48,587
|
|
$
|
(2,844
|
)
|
|
$
|
45,854
|
|
$
|
2,733
|
|
|
Equipment
|
|
|
6,193
|
|
|
6,113
|
|
|
80
|
|
|
|
6,247
|
|
|
(134
|
)
|
|
Occupancy
|
|
|
8,179
|
|
|
8,674
|
|
|
(495
|
)
|
|
|
8,894
|
|
|
(220
|
)
|
|
Payment systems related
expense
|
|
|
4,401
|
|
|
5,141
|
|
|
(740
|
)
|
|
|
4,727
|
|
|
414
|
|
|
Professional fees
|
|
|
3,416
|
|
|
4,118
|
|
|
(702
|
)
|
|
|
3,991
|
|
|
127
|
|
|
Postage, printing and
office supplies
|
|
|
2,910
|
|
|
3,265
|
|
|
(355
|
)
|
|
|
3,148
|
|
|
117
|
|
|
Marketing
|
|
|
1,585
|
|
|
3,003
|
|
|
(1,418
|
)
|
|
|
3,086
|
|
|
(83
|
)
|
|
Communications
|
|
|
1,604
|
|
|
1,549
|
|
|
55
|
|
|
|
1,525
|
|
|
24
|
|
|
Other
noninterest expense
|
|
|
8,282
|
|
|
10,425
|
|
|
(2,143
|
)
|
|
|
12,865
|
|
|
(2,440
|
)
|
|
Total noninterest expense
excluding merger-related expenses
|
|
$
|
82,313
|
|
$
|
90,875
|
|
$
|
(8,562
|
)
|
|
$
|
90,337
|
|
$
|
538
|
|
|
|
|
Merger-related expenses
|
|
|
1,772
|
|
|
-
|
|
|
1,772
|
|
|
|
-
|
|
|
-
|
|
|
Total noninterest
expense
|
|
$
|
84,085
|
|
$
|
90,875
|
|
$
|
(6,790
|
)
|
|
$
|
90,337
|
|
$
|
538
|
|
Income Taxes
. The
Company recorded a provision for income taxes of $12.2 million for the full year
2012 compared to a benefit of $20.2 million for 2011. As of December 31, 2011,
the Company determined it was appropriate to fully reverse its deferred tax
asset valuation allowance accumulated in prior years. Based on the analysis of
positive and negative evidence at December 31, 2011, including the Company’s
return to profitability over the prior six quarters, no deferred tax asset
valuation allowance was deemed necessary as of December 31, 2011. The Company
recorded a tax provision of $3.8 million in 2010.
The reconciliation between the
Company’s effective tax rate on income and the statutory rate is as
follows:
|
(Dollars in thousands)
|
|
Year ended December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Expected federal income
tax (benefit) provision
1
|
|
$
|
12,514
|
|
|
$
|
4,612
|
|
|
$
|
2,385
|
|
|
State income tax, net of federal income tax
effect
|
|
|
999
|
|
|
|
422
|
|
|
|
66
|
|
|
Interest on obligations of
state and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exempt from federal
tax
|
|
|
(785
|
)
|
|
|
(755
|
)
|
|
|
(901
|
)
|
|
Federal low income housing tax
credits
|
|
|
(477
|
)
|
|
|
(535
|
)
|
|
|
(427
|
)
|
|
Bank owned life
insurance
|
|
|
(321
|
)
|
|
|
(305
|
)
|
|
|
(302
|
)
|
|
Change in deferred tax asset valuation
allowance
|
|
|
-
|
|
|
|
(23,464
|
)
|
|
|
2,465
|
|
|
Other, net
|
|
|
317
|
|
|
|
(187
|
)
|
|
|
504
|
|
|
Total
(benefit) provision for income taxes
|
|
$
|
12,247
|
|
|
$
|
(20,212
|
)
|
|
$
|
3,790
|
|
|
|
1
|
Federal income tax provision applied at 35% in 2012 and 34% in 2011
and 2010.
|
For more information regarding the Company’s income taxes, see Note 15
“Income Taxes” to the Company’s audited consolidated financial statements
included under the section “Financial Statements and Supplementary Data” in Item
8 of this report.
28
Balance Sheet Overview
Year end 2012
balance sheet highlights were as follows:
-
Total
assets were $2.5 billion as of December 31, 2012, up slightly from $2.4
billion at December 31, 2011;
-
Total loan balances remained
relatively unchanged at $1.5 billion as compared to year end 2011;
-
The combined balance of total cash
and cash equivalents and investment securities was substantial at $909.7
million at December 31, 2012, and represented 39% of earning assets at year
end, as compared to $822.1 million and 36%, respectively, at December 31,
2011; and
-
Time deposits and money market
deposits collectively declined $98.8 million during 2012 while noninterest
bearing, interest bearing demand, and savings deposits collectively grew
$119.2 million over the same period, resulting in total deposits remaining
relatively unchanged at $1.9 billion at December 30, 2012, as compared to year
end 2011.
Our balance sheet management efforts continue to be focused on:
-
Shifting our earning asset mix toward loan balances by increasing new
loan origination production within our concentration parameters to targeted
customer segments within our markets as opportunities arise;
-
Resolving nonaccrual loans and
disposing of OREO properties; and
-
Managing the size of our balance
sheet and maintaining strong capital ratios and liquidity.
Given the
relatively weak new commercial and residential real estate construction market
conditions and fierce competition for viable and qualified new construction
projects in our operating area, we expect our real estate construction loan
originations and balances to remain at modest levels in 2013 as compared to
historical lending patterns. We do, however, anticipate more opportunities for
growth within the term commercial real estate and commercial loan categories.
Our ability to achieve loan growth will be dependent on many factors, including
the effects of the Merger, the effects of competition, health of the real estate
market, economic conditions in our markets, borrower usage of available lines,
retention of key personnel and valued customers, and our ability to close loans
in the pipeline.
Cash and Cash Equivalents
Total cash and cash equivalents balances of $137.6 million at December
31, 2012, increased $45.4 million from $92.2 million at December 31,
2011.
|
(Dollars in thousands)
|
|
Dec. 31,
|
|
% of
|
|
Dec. 31,
|
|
% of
|
|
Change
|
|
|
|
|
Dec. 31,
|
|
% of
|
|
|
|
2012
|
|
total
|
|
2011
|
|
total
|
|
Amount
|
|
|
%
|
|
2010
|
|
total
|
|
Cash and Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
70,119
|
|
51
|
%
|
|
$
|
59,955
|
|
65
|
%
|
|
$
|
10,164
|
|
|
17
|
%
|
|
$
|
42,672
|
|
24
|
%
|
|
Federal funds
sold
|
|
|
4,059
|
|
3
|
%
|
|
|
4,758
|
|
5
|
%
|
|
|
(699
|
)
|
|
-15
|
%
|
|
|
3,367
|
|
2
|
%
|
|
Interest-bearing deposits in other banks
|
|
|
63,433
|
|
46
|
%
|
|
|
27,514
|
|
30
|
%
|
|
|
35,919
|
|
|
131
|
%
|
|
|
131,952
|
|
74
|
%
|
|
Total cash and cash
equivalents
|
|
$
|
137,611
|
|
100
|
%
|
|
$
|
92,227
|
|
100
|
%
|
|
$
|
45,384
|
|
|
49
|
%
|
|
|
177,991
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.
|
|
29
Investment Portfolio
The following table shows the
amortized cost and fair value of Bancorp’s investment portfolio. At December 31,
2012, Bancorp had no securities classified as held to maturity.
|
|
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Net
|
|
|
|
Amortized
|
|
|
|
Unrealized
|
|
Amortized
|
|
|
|
Unrealized
|
|
(Dollars in thousands)
|
|
Cost
|
|
Fair Value
|
|
Gain/(Loss)
|
|
Cost
|
|
Fair Value
|
|
Gain/(Loss)
|
|
U.S. Treasury
securities
|
|
$
|
200
|
|
$
|
200
|
|
|
-
|
|
|
$
|
200
|
|
$
|
203
|
|
|
3
|
|
|
U.S. Government agency securities
|
|
|
238,775
|
|
|
243,197
|
|
|
4,422
|
|
|
|
216,211
|
|
|
219,631
|
|
|
3,420
|
|
|
Corporate
securities
|
|
|
14,303
|
|
|
9,138
|
|
|
(5,165
|
)
|
|
|
14,351
|
|
|
8,507
|
|
|
(5,844
|
)
|
|
Mortgage-backed securities
|
|
|
414,162
|
|
|
425,113
|
|
|
10,951
|
|
|
|
419,510
|
|
|
428,725
|
|
|
9,215
|
|
|
Obligations of state and
political subdivisions
|
|
|
77,827
|
|
|
82,679
|
|
|
4,852
|
|
|
|
56,003
|
|
|
60,732
|
|
|
4,729
|
|
|
Equity investments and other
securities
|
|
|
11,213
|
|
|
11,782
|
|
|
569
|
|
|
|
11,318
|
|
|
12,046
|
|
|
728
|
|
|
Total
Investment Portfolio
|
|
$
|
756,480
|
|
$
|
772,109
|
|
$
|
15,629
|
|
|
$
|
717,593
|
|
$
|
729,844
|
|
$
|
12,251
|
|
At
December 31, 2012, the estimated fair value of the investment portfolio was
$772.1 million, an increase of $42.3 million or 5.8% from $729.8 million at year
end 2011. The estimated net unrealized gain on the investment portfolio at
December 31, 2012, was $15.6 million, or 2.1% of the amortized cost base of the
total portfolio, compared to $12.3 million and 1.7%, respectively, at year end
2011. During 2012, the net unrealized gain on mortgage-backed securities
increased $1.7 million to $11.0 million at year end while the unrealized gain on
U.S. Government agency securities increased $1.0 million to $4.4 million. The
net unrealized gains in the obligations of state and political subdivisions
category remained relatively unchanged from year end 2011. The unrealized loss
on the corporate securities portfolio declined $.7 million during 2012.
During 2012, in terms of amortized
cost, we increased our investment securities balance by $38.9 million, and the
purchases were primarily of U.S. Government agency securities with 3 to 5 year
maturities, fully amortizing mortgage-backed securities, and municipal
securities. Our municipal securities purchases consisted principally of Oregon
and Washington school district securities with State guarantees. Our U.S.
Government agency securities and obligations of state and political subdivisions
balances increased by $23.6 million and $21.9 million, respectively, during
2012, as part of our efforts to maintain portfolio diversification, provide
collateral for public funds and borrowings sources, and to reduce low yielding
cash and cash equivalent balances.
For more information regarding the
Company’s fair value calculations, see Note 17 “Fair Value Measurement and Fair
Value of Financial Instruments” to the Company’s audited consolidated financial
statements included under the section “Financial Statements and Supplementary
Data” in Item 8 of this report.
At December 31, 2012, the corporate
securities portfolio included four pooled trust preferred securities with
amortized cost of $13.8 million and an estimated fair market value of $8.6
million resulting in an estimated $5.2 million unrealized loss. This unrealized
loss was associated with the decline in market value since purchase of our
investment in these pooled trust preferred securities. The collateral supporting
these securities is debt issued by banks and insurance companies. Continued wide
credit and liquidity spreads contributes to the lower market value of these
securities.
In the second quarter of 2011, the
Company recorded a credit related other-than-temporary impairment (“OTTI”)
charge of $.2 million pretax related to one of the pooled trust preferred
securities, which also was placed on nonaccrual status at the same time. An
additional credit related OTTI charge of $49,000 pretax relating to this same
security was deemed necessary in the first quarter of 2012. We do not intend to
sell this security, and it is not likely that we will be required to sell this
security, but we do not expect to recover the entire amortized cost basis of the
security. The amount of OTTI related to credit losses recognized in earnings
represents the amortized cost of the security that we do not expect to recover
and is based on the estimated cash flow expected from the security, discounted
by the estimated future coupon rates of the security. We estimate cash flows
based on the performance of the underlying collateral for the security and the
overall structure of the security. Factors considered in the performance of
underlying collateral include current default and deferral rates, estimated
future default, deferral and recovery rates, and prepayment rates. Factors
considered in the overall structure of the security include the impact of the
underlying collateral cash flow on debt coverage tests and subordination levels.
The remaining impairment on this security that is related to all other factors
is recognized in other comprehensive income. Given regulatory guidelines on
expectation of full payment of interest and principal as well as extended
principal in kind payments, this pooled trust preferred security was placed on
nonaccrual status. In addition, in October 2011 the Company placed a second
pooled trust preferred security with principal in kind payments on nonaccrual
status. While this security had an impairment loss of $1.5 million at December
31, 2012, based on our projections of future interest and principal payments,
this security had no credit related OTTI as of December 31, 2012. At year end
2012, the pooled trust preferred securities were rated C or better by the rating
agencies that cover these securities. They have several features that reduce
credit risk, including seniority over certain tranches in the same pool and the
benefit of certain collateral coverage tests.
30
At
December 31, 2012, our mortgage-backed securities portfolio had an amortized
cost base of $414.2 million and a fair market value of $425.1 million. This
portfolio consisted of U.S. Agency backed mortgages with an amortized cost of
$361.7 million and U.S. Government backed mortgage securities with an amortized
cost of $52.5 million. Floating or adjustable rate securities represented $9.0
million of this portfolio while the remainder consisted of fixed rate
securities. Ten and fifteen year pass-through mortgages, with a projected
average life of 3.7 years represented the majority of fixed rate securities
within this portfolio. Mortgage backed securities are subject to prepayment
risk. Rising prepayments reduces the projected average life and accelerates the
amortization of premium thus reducing the income from this portfolio. At
December 31, 2012, the bank owned no privately issued mortgage backed
securities.
Our portfolio of securities
representing obligations of state and political subdivisions had a fair value of
$82.7 million, with an amortized cost of $77.8 million, indicating an unrealized
gain of $4.9 million. At December 31, 2012, the ratings associated with the
securities in this segment were: 5% AAA, 81% AA, 8% A, 4% BBB, and 2% non-rated.
At December 31, 2011, the ratings associated with the securities in this segment
were: 7% AAA, 74% AA, 10% A, 7% BBB, and 2% non-rated.
At December 31, 2012, our equity and
other investment securities had a fair value of $11.8 million and consisted of
three investments in mutual fund shares and three investments in government
backed Housing and Urban Development (“HUD”) Bonds. In addition to interest
income, these investments provide the Bank with a Community Reinvestment Act
(“CRA”) benefits.
The following table summarizes the
contractual maturities and weighted average yields on Bancorp’s investment
securities:
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
After
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
One year
|
|
|
|
One through
|
|
|
|
|
Five through
|
|
|
|
|
Due after
|
|
|
|
|
|
|
|
|
|
|
|
|
or
less
|
|
Yield
|
|
five
years
|
|
Yield
|
|
ten
years
|
|
Yield
|
|
ten
years
|
|
Yield
|
|
Total
|
|
Yield
|
|
U.S. Treasury securities
|
|
$
|
-
|
|
-
|
|
|
$
|
200
|
|
0.25
|
%
|
|
$
|
-
|
|
-
|
|
|
$
|
-
|
|
-
|
|
|
$
|
200
|
|
0.25
|
%
|
|
U.S.
Government agency securities
|
|
|
102
|
|
4.37
|
%
|
|
|
180,243
|
|
2.12
|
%
|
|
|
62,852
|
|
1.34
|
%
|
|
|
-
|
|
-
|
|
|
|
243,197
|
|
1.92
|
%
|
|
Obligations of state and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political subdivisions
1
|
|
|
1,937
|
|
5.62
|
%
|
|
|
21,901
|
|
5.29
|
%
|
|
|
40,783
|
|
5.31
|
%
|
|
|
18,058
|
|
4.36
|
%
|
|
|
82,679
|
|
5.10
|
%
|
|
Other securities
2
|
|
|
7
|
|
5.99
|
%
|
|
|
2,475
|
|
4.20
|
%
|
|
|
163,278
|
|
2.91
|
%
|
|
|
280,273
|
|
3.16
|
%
|
|
|
446,033
|
|
3.07
|
%
|
|
Total
1
|
|
$
|
2,046
|
|
5.55
|
%
|
|
$
|
204,819
|
|
2.48
|
%
|
|
$
|
266,913
|
|
2.91
|
%
|
|
$
|
298,331
|
|
3.23
|
%
|
|
$
|
772,109
|
|
2.30
|
%
|
|
1
|
Yields are stated on a federal tax equivalent basis at
35%.
|
|
2
|
Contractual maturities do not reflect prepayments on
mortgage-backed and asset-backed securities.
Actual durations are
anticipated to be significantly shorter than contractual
maturities.
|
The expected duration, based upon
maturity date and estimated prepayment speeds, of Bancorp’s investment portfolio
increased from 2.5 years at December 31, 2011, to 3.0 years at December 31,
2012. The Company elected to maintain a relatively short expected duration in
light of the continued historically low market interest rate environment.
Management may consider selling certain securities and realizing gains and/or
losses in the Company’s investment portfolio on an on-going basis as part of
Bancorp’s overall business strategy. For more information regarding Bancorp’s
investment securities, see Note 2 “Investment Securities” to the Company’s
audited consolidated financial statements included under the section “Financial
Statements and Supplementary Data” in Item 8 of this report.
31
FHLB Securities
At
December 31, 2012, Bancorp owned FHLB stock of $11.9 million, a slight decrease
from $12.1 million at year end 2011. The FHLB stock is carried at amortized cost
which equals its par value because the shares can only be redeemed with the FHLB
at par. The Bank is required to maintain a minimum level of investment in FHLB
stock based on specific percentages of its outstanding mortgages and FHLB
advances. Stock redemptions are at the discretion of the FHLB or of the Company
upon prior notice to the FHLB of five years for FHLB Class B stock or six months
for FHLB Class A stock. The Company analyzes FHLB stock for OTTI. The evaluation
of OTTI on FHLB stock is based on an assessment of the ultimate recoverability
of cost rather than recognizing temporary declines in value. The Company
analyzed FHLB stock for OTTI and concluded that no impairment existed at
December 31, 2012.
Loan Portfolio
The following table provides the
composition of the loan portfolio and the balance of our allowance for loan
losses as of the dates shown:
|
|
|
December
31,
|
|
(Dollars in thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Commercial
|
|
$
|
259,333
|
|
|
18
|
%
|
|
$
|
299,766
|
|
|
20
|
%
|
|
$
|
309,327
|
|
|
20
|
%
|
|
$
|
370,077
|
|
|
21
|
%
|
|
$
|
482,405
|
|
|
23
|
%
|
|
Real estate
construction
|
|
|
32,983
|
|
|
2
|
%
|
|
|
30,162
|
|
|
2
|
%
|
|
|
44,085
|
|
|
3
|
%
|
|
|
99,310
|
|
|
6
|
%
|
|
|
285,149
|
|
|
14
|
%
|
|
Real
estate mortgage
|
|
|
288,476
|
|
|
19
|
%
|
|
|
324,994
|
|
|
22
|
%
|
|
|
349,016
|
|
|
23
|
%
|
|
|
374,668
|
|
|
22
|
%
|
|
|
393,208
|
|
|
19
|
%
|
|
Commercial real
estate
|
|
|
901,817
|
|
|
60
|
%
|
|
|
832,767
|
|
|
55
|
%
|
|
|
818,577
|
|
|
53
|
%
|
|
|
862,193
|
|
|
50
|
%
|
|
|
882,092
|
|
|
43
|
%
|
|
Installment and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consumer
|
|
|
12,320
|
|
|
1
|
%
|
|
|
13,612
|
|
|
1
|
%
|
|
|
15,265
|
|
|
1
|
%
|
|
|
18,594
|
|
|
1
|
%
|
|
|
21,942
|
|
|
1
|
%
|
|
Total
loans
|
|
|
1,494,929
|
|
|
100
|
%
|
|
|
1,501,301
|
|
|
100
|
%
|
|
|
1,536,270
|
|
|
100
|
%
|
|
|
1,724,842
|
|
|
100
|
%
|
|
|
2,064,796
|
|
|
100
|
%
|
|
|
|
Allowance for loan losses
|
|
|
(29,448
|
)
|
|
1.97
|
%
|
|
|
(35,212
|
)
|
|
2.35
|
%
|
|
|
(40,217
|
)
|
|
2.62
|
%
|
|
|
(38,490
|
)
|
|
2.23
|
%
|
|
|
(28,920
|
)
|
|
1.40
|
%
|
|
|
|
Total
loans, net
|
|
$
|
1,465,481
|
|
|
|
|
|
$
|
1,466,089
|
|
|
|
|
|
$
|
1,496,053
|
|
|
|
|
|
$
|
1,686,352
|
|
|
|
|
|
$
|
2,035,876
|
|
|
|
|
The Company’s loan portfolio of $1.5
billion at December 31, 2012, remained substantially unchanged from December 31,
2011. The declines in the commercial and real estate mortgage loan categories
were nearly offset by the growth in the commercial real estate portfolio, which
represented 60% of the total loan portfolio at year end 2012. Total real estate
construction loans represented 2% of the loan portfolio at the end of both 2012
and 2011. Interest and fees earned on our loan portfolio is our primary source
of revenue, and the decline in loan balances over the last few years has had a
significant negative impact on interest income and loan fees earned. A continued
decline in loan balances may have a material adverse impact on the Company’s
revenues and results of operations.
32
Loans
held for sale at December 31, 2012, were zero compared to $3.3 million at
December 31, 2011. In the second quarter 2012, the Bank moved exclusively to a
brokered agreement for residential real estate mortgages. The Bank acts as a
broker on behalf of the client and all funding is completed by the lender while
the Bank receives a broker fee. Residential real estate loan sales prior to the
second quarter of 2012 have no recourse, however sales were subject to proper
compliance with standard underwriting rules that, if not met, may allow the
secondary market buyer to require the Company to repurchase the note. To date,
the Company has received few requests to repurchase notes from secondary market
purchasers and related expenses have not been material. However, there can be no
assurance that we will not receive additional and increased requests to
repurchase loans, in which case possible losses to the Bank could be material to
results of operations. Also, from time to time, the Bank sells the guaranteed
portions of SBA loans with servicing rights and obligations usually
retained.
At December 31, 2012, and 2011, we
had $.2 million and $5.6 million, respectively, in outstanding loans to persons
serving as directors, senior officers, principal stockholders and their related
interests. These loans were made substantially on the same terms, including
interest rates, maturities and collateral requirements, as those made to other
customers of the Bank. At December 31, 2012, and 2011, the Bank had no banker’s
acceptances.
The following table presents the
maturity distribution and interest rate sensitivity of the Company’s loan
portfolio by category at December 31, 2012:
|
(Dollars in thousands)
|
|
Commercial
|
|
Real estate
|
|
Real estate
|
|
Commercial
|
|
Installment
|
|
|
|
|
|
|
loans
|
|
construction
|
|
mortgage
|
|
real estate
|
|
and other
|
|
Total
|
|
Maturity
distribution:
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one
year
|
|
$
|
135,957
|
|
$
|
19,046
|
|
$
|
11,808
|
|
$
|
52,548
|
|
$
|
3,603
|
|
$
|
222,962
|
|
Due after one
through five years
|
|
|
82,571
|
|
|
13,937
|
|
|
134,927
|
|
|
232,348
|
|
|
3,179
|
|
|
466,962
|
|
Due after five
years
|
|
|
40,805
|
|
|
-
|
|
|
141,741
|
|
|
616,921
|
|
|
5,538
|
|
|
805,005
|
|
Total
|
|
$
|
259,333
|
|
$
|
32,983
|
|
$
|
288,476
|
|
$
|
901,817
|
|
$
|
12,320
|
|
$
|
1,494,929
|
|
Interest rate sensitivity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-interest rate
loans
|
|
$
|
84,216
|
|
$
|
1,998
|
|
$
|
61,194
|
|
$
|
288,660
|
|
$
|
5,795
|
|
$
|
441,863
|
|
Floating or
adjustable interest rate loans
2
|
|
|
175,117
|
|
|
30,985
|
|
|
227,282
|
|
|
613,157
|
|
|
6,525
|
|
|
1,053,066
|
|
Total
|
|
$
|
259,333
|
|
$
|
32,983
|
|
$
|
288,476
|
|
$
|
901,817
|
|
$
|
12,320
|
|
$
|
1,494,929
|
|
1
|
The
table is based on stated maturities, not expected maturities or
durations.
|
|
2
|
Certain loans contain provisions which place maximum or
minimum limits on interest rates or interest rate changes. Adjustable rate
loans include all loans whose rates could change prior to
maturity.
|
The table above breaks down our loan
portfolio by stated maturity distribution and interest rate sensitivity. At
December 31, 2012, the majority of our loans have stated maturity dates beyond
five years. However, 70% of our loans had interest rates that adjust prior to
the stated maturity, while the remaining 30% of our loans are at a fixed rate
until their maturity date. The above table does not take into account
unscheduled payment of principal which could occur prior to the stated maturity
or scheduled interest rate adjustments.
Below is a discussion of our loan
portfolio by category.
Commercial.
The composition of commercial loans as
of December 31, 2012, and December 31, 2011 was as follows:
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
(Dollars in thousands)
|
|
December 31,
2012
|
|
|
of
total
|
|
December 31,
2011
|
|
|
of
total
|
|
Change
|
|
change
|
|
December 31,
2010
|
|
|
of
total
|
|
Commercial lines of credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitment
|
|
$
|
438,696
|
|
|
|
|
|
$
|
450,414
|
|
|
|
|
|
$
|
(11,718
|
)
|
|
-3
|
%
|
|
$
|
448,042
|
|
|
|
|
|
Outstanding balance
|
|
|
154,056
|
|
|
59
|
%
|
|
|
187,899
|
|
|
63
|
%
|
|
|
(33,843
|
)
|
|
-18
|
%
|
|
|
187,983
|
|
|
61
|
%
|
|
Utilization %
|
|
|
35.1
|
%
|
|
|
|
|
|
41.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
42.0
|
%
|
|
|
|
|
|
|
Commercial term loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitment
|
|
$
|
105,277
|
|
|
|
|
|
$
|
111,867
|
|
|
|
|
|
$
|
(6,590
|
)
|
|
-6
|
%
|
|
$
|
121,344
|
|
|
|
|
|
Outstanding balance
|
|
|
105,277
|
|
|
41
|
%
|
|
|
111,867
|
|
|
37
|
%
|
|
|
(6,590
|
)
|
|
-6
|
%
|
|
|
121,344
|
|
|
39
|
%
|
|
|
|
Total commercial lines and loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitment
|
|
$
|
543,973
|
|
|
|
|
|
$
|
562,281
|
|
|
|
|
|
$
|
(18,308
|
)
|
|
-3
|
%
|
|
$
|
569,386
|
|
|
|
|
|
Outstanding balance
|
|
|
259,333
|
|
|
100
|
%
|
|
|
299,766
|
|
|
100
|
%
|
|
|
(40,433
|
)
|
|
-13
|
%
|
|
|
309,327
|
|
|
100
|
%
|
33
At
December 31, 2012, total commercial loans and lines of credit at $259.3 million
represented approximately 18% of the Company’s total loan portfolio. The total
commercial loan and line balance declined $40.5 million or 13% from $299.8
million at year end 2011. This decline was primarily due to a $33.8 million
reduction in commercial lines of credit balances during 2012. Commercial lines
of credit accounted for $154.1 million or 59% of the commercial loan portfolio
at year end 2012. At year end 2012, commercial term loans accounted for $105.3
million or 41% of the total commercial outstanding balance as compared to $111.9
million and 37% a year ago. While origination volume of commercial term loan and
line commitments remained stable in 2012 compared with 2011, the uneven and
uncertain economic environment has caused borrowers to reduce their commercial
line utilization, which during 2012 declined from 42% to 35%, the lowest level
since the Company commenced tracking this measure. Total commercial line
commitment also declined during 2012 contributing to lower commercial line
balances. Commercial term loans are typically intermediate to long-term (two to
ten years) secured credit used to finance capital equipment while commercial
lines of credit are generally revolving loans typically used to finance
short-term or seasonal working capital needs.
In originating commercial loans and
lines, our underwriting standards may include maximum loan to value ratios,
minimum target levels for debt service coverage and other financial covenants
specific to the loan and the borrower. Common forms of collateral pledged to
secure our commercial loans are real estate, accounts receivable, inventory,
equipment, agricultural crops and/or livestock and marketable securities.
Commercial loans and lines of credit typically have maximum terms of one to ten
years and loan to value ratios in the range of 50% to 80% at
origination.
Real Estate Construction.
The composition of our real estate
construction portfolio as of December 31, 2012, 2011, and 2010, is presented in
the following table:
|
(Dollars in thousands)
|
|
December 31,
2012
|
|
December 31,
2011
|
|
Change
|
|
December 31,
2010
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Commercial
construction
|
|
$
|
25,558
|
|
|
77
|
%
|
|
$
|
17,538
|
|
|
58
|
%
|
|
$
|
8,020
|
|
|
46
|
%
|
|
$
|
19,781
|
|
|
45
|
%
|
|
Two-step residential construction
loans
|
|
|
185
|
|
|
1
|
%
|
|
|
628
|
|
|
2
|
%
|
|
|
(443
|
)
|
|
-71
|
%
|
|
|
1,132
|
|
|
3
|
%
|
|
Residential construction
to builders
|
|
|
3,458
|
|
|
10
|
%
|
|
|
6,162
|
|
|
20
|
%
|
|
|
(2,704
|
)
|
|
-44
|
%
|
|
|
12,301
|
|
|
28
|
%
|
|
Residential subdivision or site
development
|
|
|
4,141
|
|
|
12
|
%
|
|
|
5,935
|
|
|
20
|
%
|
|
|
(1,794
|
)
|
|
-30
|
%
|
|
|
10,903
|
|
|
24
|
%
|
|
Net deferred
fees
|
|
|
(359
|
)
|
|
0
|
%
|
|
|
(101
|
)
|
|
0
|
%
|
|
|
(258
|
)
|
|
-255
|
%
|
|
|
(32
|
)
|
|
0
|
%
|
|
Total real
estate construction loans
|
|
$
|
32,983
|
|
|
100
|
%
|
|
$
|
30,162
|
|
|
100
|
%
|
|
$
|
2,821
|
|
|
9
|
%
|
|
$
|
44,085
|
|
|
100
|
%
|
At December 31, 2012, the balance of
real estate construction loans was $33.0 million, up $2.8 million or 9% from
$30.2 million at December 31, 2011, which in turn was down from $44.1 million at
December 31, 2010. We anticipate the construction loan portfolio to remain
relatively modest as a percentage of the overall loan portfolio in
2013.
34
Real
estate construction loans to builders are generally secured by the property
underlying the project that is being financed. Construction loans to builders
and developers typically have terms from 12 to 24 months and initial loan to
value ratios in the range of 60% to 80% based on the estimated “as-is” and
“as-proposed” values of the project at the time of loan origination.
At December 31, 2012, the Bank’s
real estate construction concentration was 11% relative to Tier 1 capital and
allowance for credit losses and was well within the Interagency Guidelines for
Real Estate Lending and the Commercial Real Estate Lending Joint Guidance policy
guidelines which set forth a 100% limit for such ratio. New loan origination
activity in this loan category has been and continues to be limited due to the
prolonged weakness in real estate market conditions.
Real Estate Mortgage.
The following table presents the
components of our real estate mortgage loan portfolio:
|
(Dollars in thousands)
|
|
December 31,
2012
|
|
December 31,
2011
|
|
Change
|
|
December 31,
2010
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Mortgage
|
|
$
|
49,122
|
|
17
|
%
|
|
$
|
58,099
|
|
18
|
%
|
|
$
|
(8,977
|
)
|
|
-15
|
%
|
|
$
|
67,525
|
|
19
|
%
|
|
Nonstandard mortgage product
|
|
|
5,838
|
|
2
|
%
|
|
|
8,511
|
|
3
|
%
|
|
|
(2,673
|
)
|
|
-31
|
%
|
|
|
12,523
|
|
4
|
%
|
|
Home equity loans and lines of
credit
|
|
|
233,516
|
|
81
|
%
|
|
|
258,384
|
|
79
|
%
|
|
|
(24,868
|
)
|
|
-10
|
%
|
|
|
268,968
|
|
77
|
%
|
|
Total real estate
mortgage
|
|
$
|
288,476
|
|
100
|
%
|
|
$
|
324,994
|
|
100
|
%
|
|
$
|
(36,518
|
)
|
|
-11
|
%
|
|
$
|
349,016
|
|
100
|
%
|
The total real estate mortgage loan
portfolio was $288.5 million or approximately 19% of the Company’s total loan
portfolio at December 31, 2012, a reduction of $36.5 million from $325.0 million
twelve months earlier. At December 31, 2012, mortgage loans measured $49.1
million, of which $24.2 million consisted of standard residential mortgage loans
to homeowners. The remaining $24.9 million was associated with commercial
interests utilizing residences as collateral. Such commercial interests included
$18.5 million related to businesses, $1.2 million related to condominiums, and
$2.2 million related to residential land.
At year end 2012, home equity lines
and loans were $233.5 million, a decline of $24.9 million from $258.4 million a
year earlier, and represented 81% of the real estate mortgage portfolio. The
Bank’s home equity portfolio was almost entirely generated within our market
area and through our branch network. The home equity portfolio balances have
trended lower as new loan and line originations within this portfolio slowed
significantly over the past few years reflecting weak customer demand and market
conditions for home equity lending and corresponding adjustments made to our
pricing and underwriting standards. As shown below, the year end 2012 home
equity line utilization percentage for loans originated in 2012 averaged
approximately 50%, which was relatively consistent with utilization for line
production in 2011 and 2010.
|
(Dollars in thousands)
|
|
Year of Origination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 &
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
Earlier
|
|
Total
|
|
Home equity lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
$
|
9,707
|
|
|
$
|
19,558
|
|
|
$
|
19,994
|
|
|
$
|
23,288
|
|
|
$
|
46,592
|
|
|
$
|
59,990
|
|
|
$
|
175,926
|
|
|
$
|
355,055
|
|
|
Outstanding
balance
|
|
|
4,813
|
|
|
|
9,006
|
|
|
|
9,777
|
|
|
|
13,153
|
|
|
|
29,565
|
|
|
|
41,167
|
|
|
|
108,539
|
|
|
|
216,020
|
|
|
|
|
Utilization at year end
(1)
|
|
|
49.6
|
%
|
|
|
46.0
|
%
|
|
|
48.9
|
%
|
|
|
56.5
|
%
|
|
|
63.5
|
%
|
|
|
68.6
|
%
|
|
|
61.7
|
%
|
|
|
60.8
|
%
|
|
|
|
Home equity loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance
|
|
|
617
|
|
|
|
700
|
|
|
|
1,054
|
|
|
|
2,365
|
|
|
|
4,688
|
|
|
|
3,041
|
|
|
|
4,108
|
|
|
|
16,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total home equity
outstanding
|
|
$
|
5,430
|
|
|
$
|
9,706
|
|
|
$
|
10,831
|
|
|
$
|
15,518
|
|
|
$
|
34,253
|
|
|
$
|
44,208
|
|
|
$
|
112,647
|
|
|
$
|
232,593
|
|
|
(1)
|
For the purposes of utilization percentages, the outstanding
balance does not include deferred costs and fees of $.9
million
|
Approximately 41% of the Bank’s home
equity portfolio is in first lien position at year end 2012, and this collateral
position helps mitigate overall portfolio risk. There were other types of loans
as well as deposits derived from our home equity borrowers at year end 2012,
which we believe were a result of our home equity line and loan portfolios being
sourced to relationship customers through the Company’s branch
network.
35
The following table shows home
equity lines of credit and loans by metropolitan service. The majority of our
home equity lines and loans are secured by homes in the Portland-Beaverton,
Oregon, Vancouver, Washington and Salem, Oregon markets, where the majority of
our branches are also located.
|
(Dollars in thousands)
|
|
December 31,
2012
|
|
December 31,
2011
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
Region
|
|
|
Amount
|
|
total
|
|
Amount
|
|
total
|
|
Portland-Beaverton, Oregon / Vancouver,
Washington
|
|
|
109,878
|
|
47.1
|
%
|
|
|
122,543
|
|
47.4
|
%
|
|
Salem, Oregon
|
|
|
56,860
|
|
24.3
|
%
|
|
|
61,019
|
|
23.6
|
%
|
|
Oregon non-metropolitan area
|
|
|
25,764
|
|
11.0
|
%
|
|
|
27,419
|
|
10.6
|
%
|
|
Olympia, Washington
|
|
|
13,747
|
|
5.9
|
%
|
|
|
17,268
|
|
6.7
|
%
|
|
Washington non-metropolitan area
|
|
|
11,653
|
|
5.0
|
%
|
|
|
12,859
|
|
5.0
|
%
|
|
Bend, Oregon
|
|
|
3,261
|
|
1.4
|
%
|
|
|
4,377
|
|
1.7
|
%
|
|
Other
|
|
|
12,353
|
|
5.3
|
%
|
|
|
12,899
|
|
5.0
|
%
|
|
Total home equity loan
and line portfolio
|
|
$
|
233,516
|
|
100.0
|
%
|
|
$
|
258,384
|
|
100.0
|
%
|
Commercial Real Estate.
The
composition of commercial real estate loan types based on collateral is as
follows:
|
(Dollars in thousands)
|
|
December 31, 2012
|
|
December 31, 2011
|
|
December 31, 2010
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Office Buildings
|
|
$
|
188,441
|
|
20.9
|
%
|
|
$
|
173,295
|
|
20.8
|
%
|
|
$
|
182,376
|
|
22.3
|
%
|
|
Multi-Family - 5+ Residential
|
|
|
144,376
|
|
16.0
|
%
|
|
|
63,027
|
|
7.6
|
%
|
|
|
58,606
|
|
7.2
|
%
|
|
Retail
Facilities
|
|
|
139,274
|
|
15.4
|
%
|
|
|
118,678
|
|
14.3
|
%
|
|
|
108,874
|
|
13.3
|
%
|
|
Commercial/Agricultural
|
|
|
71,366
|
|
7.9
|
%
|
|
|
60,094
|
|
7.2
|
%
|
|
|
54,361
|
|
6.6
|
%
|
|
Industrial Parks and
related
|
|
|
51,327
|
|
5.7
|
%
|
|
|
55,392
|
|
6.7
|
%
|
|
|
59,493
|
|
7.3
|
%
|
|
Medical Offices
|
|
|
39,842
|
|
4.4
|
%
|
|
|
60,993
|
|
7.3
|
%
|
|
|
55,294
|
|
6.8
|
%
|
|
Food
Establishments
|
|
|
37,728
|
|
4.2
|
%
|
|
|
19,054
|
|
2.3
|
%
|
|
|
16,370
|
|
2.0
|
%
|
|
Manufacturing Plants
|
|
|
37,652
|
|
4.2
|
%
|
|
|
51,852
|
|
6.2
|
%
|
|
|
47,341
|
|
5.8
|
%
|
|
Hotels/Motels
|
|
|
19,680
|
|
2.2
|
%
|
|
|
35,893
|
|
4.3
|
%
|
|
|
35,724
|
|
4.4
|
%
|
|
Mini Storage
|
|
|
18,625
|
|
2.1
|
%
|
|
|
19,037
|
|
2.3
|
%
|
|
|
24,678
|
|
3.0
|
%
|
|
Land Development and Raw
Land
|
|
|
15,267
|
|
1.7
|
%
|
|
|
17,278
|
|
2.1
|
%
|
|
|
19,534
|
|
2.4
|
%
|
|
Assisted Living
|
|
|
10,385
|
|
1.1
|
%
|
|
|
22,040
|
|
2.6
|
%
|
|
|
25,669
|
|
3.1
|
%
|
|
Other
|
|
|
127,854
|
|
14.2
|
%
|
|
|
136,134
|
|
16.3
|
%
|
|
|
130,257
|
|
15.8
|
%
|
|
Total
commercial real estate loans
|
|
$
|
901,817
|
|
100.0
|
%
|
|
$
|
832,767
|
|
100.0
|
%
|
|
$
|
818,577
|
|
100.0
|
%
|
The commercial real estate portfolio
increased $69.1 million or 8% during 2012. At year end 2012, office buildings
totaling $188.4 million represented the largest collateral segment, and
accounted for 21% of the collateral securing the commercial real estate
portfolio. The multi-family 5+ residential category, which at year end 2012
accounted for the second largest collateral segment, increased $81.3 million
during 2012 to $144.4 million or 16% of the portfolio compared to 8% twelve
months earlier. The Bank’s multi-family loan commitments are being monitored
closely, and concentration limits may start to restrict new originations for
both new construction and stabilized multi-family properties during 2013. The
loan balance for retail facilities increased $20.6 million during 2012 to $139.3
million at year end. Commercial real estate markets continue to be vulnerable to
financial and valuation pressures that may limit refinance options and
negatively impact borrowers’ ability to perform under existing loan agreements.
Declining values of commercial real estate or higher market interest rates may
have a further adverse effect on the ability of borrowers with maturing loans to
satisfy loan to value ratios or other conditions required to renew such loans.
The Company’s underwriting of commercial real estate loans generally includes
loan to value ratios at origination not exceeding 75% and debt service coverage
ratios at 120% or better.
The
composition of the commercial real estate loan portfolio by occupancy type is as
follows:
|
|
|
December 31,
|
|
December 31,
|
|
Change
|
|
(Dollars in thousands)
|
|
2012
|
|
2011
|
|
|
|
|
|
Mix
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Owner occupied
|
|
$
|
369,103
|
|
41
|
%
|
|
$
|
390,589
|
|
47
|
%
|
|
$
|
(21,486
|
)
|
|
-6
|
%
|
|
Non-owner occupied
|
|
|
532,714
|
|
59
|
%
|
|
|
442,178
|
|
53
|
%
|
|
|
90,536
|
|
|
20
|
%
|
|
Total commercial
real estate loans
|
|
$
|
901,817
|
|
100
|
%
|
|
$
|
832,767
|
|
100
|
%
|
|
$
|
69,050
|
|
|
|
|
36
While the
owner occupied category declined $21.5 million or 6% in 2012, the non-owner
occupied category of the Company’s commercial real estate portfolio increased by
$90.5 million or 20% over the same period. The mix between owner occupied and
non-owner occupied collateral types within the total commercial real estate
portfolio changed to 41% and 59%, respectively, at year end 2012 from 47% and
53%, respectively, a year earlier. At December 31, 2012, the Bank’s commercial
real estate concentration, at 139% relative to Tier 1 capital and allowance for
credit losses, was well within the Interagency Guidelines for Real Estate
Lending and the Commercial Real Estate Lending Joint Guidance policy guidelines
which set forth a 300% limit for such ratio.
The following table shows the
commercial real estate portfolio by current property location:
|
(Dollars in thousands)
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Percent of
|
|
Percent of
|
|
|
|
|
|
|
Number of
|
|
total loans by
|
|
branches by
|
|
Region
|
|
Amount
|
|
loans
|
|
market
|
|
market
|
|
Portland-Beaverton, Oregon/Vancouver,
Washington
|
|
$
|
441,168
|
|
717
|
|
48.9
|
%
|
|
47.4
|
%
|
|
Salem, Oregon
|
|
|
173,572
|
|
367
|
|
19.3
|
%
|
|
27.1
|
%
|
|
Oregon non-metropolitan area
|
|
|
69,209
|
|
154
|
|
7.7
|
%
|
|
6.8
|
%
|
|
Seattle-Tacoma-Bellevue, Washington
|
|
|
43,682
|
|
49
|
|
4.8
|
%
|
|
1.7
|
%
|
|
Eugene-Springfield, Oregon
|
|
|
39,127
|
|
62
|
|
4.3
|
%
|
|
3.4
|
%
|
|
Olympia, Washington
|
|
|
36,074
|
|
74
|
|
4.0
|
%
|
|
6.8
|
%
|
|
Washington non-metropolitan area
|
|
|
28,693
|
|
97
|
|
3.2
|
%
|
|
6.8
|
%
|
|
Bend, Oregon
|
|
|
24,732
|
|
25
|
|
2.7
|
%
|
|
0.0
|
%
|
|
Other
|
|
|
45,560
|
|
63
|
|
5.1
|
%
|
|
0.0
|
%
|
|
Total commercial
real estate loans
|
|
$
|
901,817
|
|
1,608
|
|
100.0
|
%
|
|
100.0
|
%
|
As shown in the table above, the
properties within our commercial real estate portfolio at year end 2012 are
predominantly located in geographic areas where we have branch presence. At year
end 2012 the average loan balance in our commercial real estate portfolio was
approximately $.6 million.
The following table shows the
commercial real estate portfolio by year of stated maturity:
|
|
|
December 31, 2012
|
|
|
|
|
|
|
Number of
|
|
Percent of
|
|
(Dollars in thousands)
|
|
Amount
|
|
loans
|
|
total
|
|
2013
|
|
$
|
52,734
|
|
102
|
|
5.8
|
%
|
|
2014
|
|
|
38,611
|
|
86
|
|
4.3
|
%
|
|
2015 and after
|
|
|
810,472
|
|
1,420
|
|
89.9
|
%
|
|
Total commercial
real estate loans
|
|
$
|
901,817
|
|
1,608
|
|
100.0
|
%
|
At year end 2012, the stated loan
maturities in 2013 and 2014 totaled $91.3 million or approximately 10.1% of the
$901.8 million total commercial real estate portfolio.
37
Credit Management
.
Credit
risk is inherent in our lending activities. We manage the general risks in the
loan portfolio by following loan policies and underwriting practices designed to
result in prudent lending activities. In addition, we attempt to manage our risk
through our credit administration and credit review functions that are designed
to help confirm our credit standards are being followed. Through the credit
review function we monitor credit related policies and practices on a post
approval basis. Significant findings and periodic reports are communicated to
the chief credit officer and chief executive officer and, in certain cases, to
the Loan, Investment, & Asset/Liability Committee, which is comprised of
certain directors. Credit risk in the loan portfolio can be amplified by loan
concentrations. We manage our concentration risk on an ongoing basis by
establishing a maximum amount of credit that may be extended to any one borrower
and by employing concentration limits that regulate exposure levels by product
type and portfolio category. We also employ concentration limits by geography
for certain commercial and residential real estate loans.
Until our regional economy generates
and sustains higher levels of overall business activity and employment levels,
financial pressures will continue to challenge borrowers in many industry
segments. We are closely monitoring our credit exposure in both owner occupied
and non-owner occupied term real estate. An important component of managing risk
in the commercial real estate portfolio involves stress testing, at both a
portfolio and individual borrower level. Our stress test for individual
commercial real estate borrowers focuses on examining project performance
relative to cash flow and collateral value under a range of assumptions that
include interest rates, absorption, unit sales prices, and capitalization rates.
This level of risk monitoring assists the Bank to identify potential problem
loans early and develop action plans on a timely basis, which may include
requiring borrowers to provide curtailments, pledge additional collateral, or
transfer the borrowing relationship to our special asset team for closer
monitoring.
The prolonged duration of the
economic downturn coupled with elevated unemployment levels has also impacted
our portfolio of home equity loans and lines. We analyze our home equity
portfolio on an ongoing basis. Our process typically involves updating credit
scores, tracking past dues, line utilization rates, and assessing collateral
exposure. Based on our analysis we may request certain borrowers to consider
restructuring their credit facility with the Bank.
Current economic conditions continue
to challenge the banking industry. Consequently, we are tightly focused on
monitoring and managing credit risk across all of our loan portfolios. As part
of our ongoing lending process, a risk analysis is prepared for each primary
credit action with the borrower before the funds are advanced. Most borrowers
are assigned individual risk ratings which are based on our assessment of the
borrower’s credit worthiness and the quality of our collateral position at the
time a particular loan is made. Thereafter, credit risk ratings are evaluated on
an ongoing basis focusing on our interpretation of relevant risk factors known
to us at the time of each evaluation. Large credit relationships have their
credit risk rating reviewed at least annually, and given current economic
conditions, risk rating evaluations may occur more frequently. Our relationship
managers play a critical role in this process by evaluating the ongoing
financial condition of each borrower in their respective portfolio of loans.
These activities include, but are not limited to, maintaining open communication
channels with borrowers, analyzing periodic financial statements and cash flow
projections, tracking financial trends, evaluating collateral, monitoring
covenant compliance, and evaluating the financial capacity of guarantors.
Collectively, these activities represent an ongoing process that results in an
assessment of credit risk associated with each commercial, real estate
construction and commercial real estate loan consistent with our internal risk
rating guidelines. Our risk rating process is a central component in estimating
the required allowance for credit losses, as discussed in the Allowance for
Credit Losses section which follows. Credit files are also examined periodically
on a sample test basis by our credit review department and internal auditors, as
well as by regulatory examiners.
Although a risk of nonpayment exists
with respect to all loans, certain specific types of risks are associated with
different types of loans. The expected source of repayment of loans is generally
the cash flow of a particular project, income from the borrower's business,
conversion of trading assets to cash, proceeds from the sale of real property,
proceeds of refinancing, or personal income. Real estate is frequently a
material component of collateral for our loans. Risks associated with loans
secured by real estate include the risks of decreasing land and property values,
material increases in interest rates, deterioration in local economic
conditions, changes in tax policies, and tightening credit or refinancing
markets. A concentration of loans within any one market area may increase these
risks.
38
Nonperforming Assets, Troubled Debt
Restructurings, OREO and Delinquencies
Nonperforming assets.
The
following table presents information with respect to nonperforming assets as of
the dates shown:
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
Nonperforming
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,313
|
|
|
$
|
7,750
|
|
|
$
|
13,377
|
|
|
$
|
36,211
|
|
|
$
|
6,250
|
|
|
Real estate
construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real
estate construction
|
|
|
-
|
|
|
|
3,750
|
|
|
|
4,077
|
|
|
|
1,488
|
|
|
|
2,922
|
|
|
Residential
real estate construction
|
|
|
1,336
|
|
|
|
2,073
|
|
|
|
6,615
|
|
|
|
22,373
|
|
|
|
90,712
|
|
|
Total real estate construction
|
|
|
1,336
|
|
|
|
5,823
|
|
|
|
10,692
|
|
|
|
23,861
|
|
|
|
93,634
|
|
|
Real estate
mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
2,653
|
|
|
|
6,161
|
|
|
|
9,318
|
|
|
|
11,563
|
|
|
|
8,283
|
|
|
Nonstandard
mortgage
|
|
|
3,341
|
|
|
|
3,463
|
|
|
|
5,223
|
|
|
|
8,752
|
|
|
|
15,229
|
|
|
Home equity
loans and lines of credit
|
|
|
3,782
|
|
|
|
2,325
|
|
|
|
950
|
|
|
|
2,036
|
|
|
|
1,043
|
|
|
Real estate
mortgage
|
|
|
9,776
|
|
|
|
11,949
|
|
|
|
15,491
|
|
|
|
22,351
|
|
|
|
24,555
|
|
|
Commercial real estate
|
|
|
9,659
|
|
|
|
15,070
|
|
|
|
21,671
|
|
|
|
16,778
|
|
|
|
3,145
|
|
|
Installment and other
consumer
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
144
|
|
|
|
6
|
|
|
Total loans on
nonaccrual status
|
|
|
25,084
|
|
|
|
40,597
|
|
|
|
61,231
|
|
|
|
99,345
|
|
|
|
127,590
|
|
|
Loans past due 90 days or
more but not on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonaccrual
status
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other real estate
owned
|
|
|
16,112
|
|
|
|
30,823
|
|
|
|
39,459
|
|
|
|
53,594
|
|
|
|
70,110
|
|
|
Total
nonperforming assets
|
|
$
|
41,196
|
|
|
$
|
71,420
|
|
|
$
|
100,690
|
|
|
$
|
152,939
|
|
|
$
|
197,700
|
|
|
Percentage of
nonperforming assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total
assets
|
|
|
1.66
|
%
|
|
|
2.94
|
%
|
|
|
4.09
|
%
|
|
|
5.60
|
%
|
|
|
7.86
|
%
|
|
|
|
Total assets
|
|
$
|
2,488,180
|
|
|
$
|
2,429,887
|
|
|
$
|
2,461,059
|
|
|
$
|
2,733,547
|
|
|
$
|
2,516,140
|
|
Total
nonperforming assets consist of nonaccrual loans, loans past due more than 90
days and still accruing interest, and OREO. At December 31, 2012, total
nonperforming assets were $41.2 million, or 1.7% of total assets, which was down
from $71.4 million, or 2.9% of total assets, at December 31, 2011. The balance
of total nonperforming assets reflected write downs totaling $31.4 million or
44% from the original loan principal balance compared to write downs totaling
40% twelve months ago. The decline in total nonperforming assets in 2012
resulted from OREO sales, nonaccrual loan pay-downs and payoffs, and net
charge-offs collectively exceeding the inflow of additional nonaccrual loans.
Total nonaccrual loans declined by $15.5 million or 38%, to $25.1 million at
December 31, 2012, from $40.6 million at year end 2011. Troubled debt
restructuring nonaccrual loan balances were $11.4 million and $21.8 million at
December 31, 2012, and 2011, respectively, which are included in total
nonaccrual loans. During 2012, nonaccrual loan balances declined across most
loan categories. Total nonperforming assets declined $29.3 million or 29% in
2011.
Generally, loans are placed on
nonaccrual status and no interest is accrued when factors indicate collection of
interest or principal in accordance with the contractual terms is doubtful or
when the principal or interest payment becomes 90 days past due. For such loans,
previously accrued but uncollected interest is reversed and charged against
current earnings and additional income is only recognized to the extent payments
are subsequently received and the loan is placed back on an interest accruing
status. Interest income foregone on nonaccrual loans was approximately $3.4
million, $4.1 million, and $6.5 million in 2012, 2011, and 2010,
respectively.
A loan is considered to be impaired
when it is probable that we will be unable to collect all amounts due according
to the contractual terms of the loan agreement or when it has been restructured
in a troubled debt restructuring. At December 31, 2012, 2011, and 2010, Bancorp
had loans that were considered to be impaired, which include troubled debt
restructurings, of $42.5 million, $56.4 million, and $76.7 million,
respectively. Impaired loans are measured based on the present value of expected
future cash flows, discounted at the loan’s effective interest rate or, as a
practical expedient, at the loan’s observable market price or the fair market
value of the collateral less selling costs if the loan is collateral dependent.
Loans that are measured at lower of cost or fair value and certain large groups
of smaller balance homogeneous loans collectively measured for impairment are
excluded from impairment measurement. Impaired loans are charged off promptly to
the allowance for loan losses when management believes, after considering
economic, market, and business conditions, collection efforts, collateral
position, and other factors deemed relevant, that the borrower’s financial
condition is such that collection of principal and interest is not probable.
For the years ended December 31,
2012, 2011, and 2010, interest income recognized on impaired loans totaled
$999,000, $1,035,000, and $568,000, respectively. Interest income on loans is
accrued daily on the principal balance outstanding.
Troubled Debt
Restructurings.
At December 31, 2012, Bancorp had $28.8 million in loans
classified as troubled debt restructurings, of which $17.4 million was on an
interest accruing status and $11.4 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, with the remaining $21.8 million on
nonaccrual status. All troubled debt restructurings were considered impaired at
year end 2012 and 2011. The modifications granted on troubled debt
restructurings were due to borrower financial difficulty, and generally provide
for a modification of loan terms. The decrease in troubled
debt restructurings reflects a decrease in the number of loan modifications in
2012. For more information regarding Bancorp’s troubled debt restructurings and
loans, see Note 3 “Loans and Allowance for Credit Losses” to the Company’s
audited consolidated financial statements included under the section “Financial
Statements and Supplementary Data” in Item 8 of this report.
39
Other Real
Estate Owned.
The following table presents
activity in the total OREO portfolio for the periods shown:
|
(Dollars in
thousands)
|
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
Amount
|
|
# of properties
|
|
Amount
|
|
# of
properties
|
|
Beginning balance
|
|
$
|
30,823
|
|
|
264
|
|
|
$
|
39,459
|
|
|
402
|
|
|
Additions to OREO
|
|
|
4,700
|
|
|
41
|
|
|
|
21,139
|
|
|
74
|
|
|
Capitalized
improvements
|
|
|
160
|
|
|
-
|
|
|
|
523
|
|
|
-
|
|
|
Valuation
adjustments
|
|
|
(3,007
|
)
|
|
-
|
|
|
|
(4,832
|
)
|
|
-
|
|
|
Disposition of OREO
properties
|
|
|
(16,564
|
)
|
|
(113
|
)
|
|
|
(25,466
|
)
|
|
(212
|
)
|
|
Ending
balance
|
|
$
|
16,112
|
|
|
192
|
|
|
$
|
30,823
|
|
|
264
|
|
OREO is real
property that the Bank has taken possession of either through a deed-in-lieu of
foreclosure, non-judicial foreclosure, judicial foreclosure or similar process
in full or partial satisfaction of a loan or loans. At December 31, 2012, the
OREO portfolio consisted of 192 properties valued at $16.1 million. During 2012,
the Company remained focused on OREO property disposition activities, resulting
in the sale of $16.6 million in OREO property compared to $25.5 million in 2011.
The Company assumed $4.7 million in additional OREO properties in 2012, down
from $21.1 million in 2011. Reflecting lower OREO balances as well as a
stabilization of local real estate market values, OREO valuation adjustments
fell to $3.0 million in 2012 from $4.8 million in 2011. At December 31, 2012,
OREO balances reflected write-downs totaling 63% from the original loan
principal, as compared to 53% a year ago. The largest categories of the OREO
balance at December 31, 2012, were attributable to income producing properties
followed by land and homes, all of which are generally located within our
footprint. The residential site development balance and number of such
properties declined in 2012 due to continued lot sales and significantly fewer
new such properties taken into possession during the year compared to recent
years.
OREO is recorded at the lower of the carrying amount of the loan or fair
value less estimated costs to sell. Management is responsible for estimating the
fair market value of OREO and utilizes appraisals and internal judgments in its
assessment of fair market value and estimated selling costs. This estimate
becomes the property’s book value at the time it is taken into OREO. If the
estimate is below the carrying value of the related loan, the amount of the
required adjustment is charged to the allowance for loan losses at the time the
property is taken into OREO. Management reviews OREO at least annually to
determine whether the property continues to be carried at the lower of its
recorded book value or fair value, net of estimated costs to sell. Any further
OREO valuation adjustments or subsequent gains or losses upon final disposition
of OREO are charged to other noninterest income. Expenses from the acquisition,
maintenance and disposition of OREO properties are included in other noninterest
expense in the consolidated statements of income.
The following table presents categories of the OREO portfolio for the
periods shown:
|
(Dollars in thousands)
|
|
December 31,
|
|
# of
|
|
December 31,
|
|
# of
|
|
|
|
2012
|
|
properties
|
|
2011
|
|
properties
|
|
Income producing
properties
|
|
$
|
3,821
|
|
8
|
|
$
|
10,282
|
|
15
|
|
Land
|
|
|
3,575
|
|
12
|
|
|
5,049
|
|
16
|
|
Homes
|
|
|
2,927
|
|
12
|
|
|
6,008
|
|
17
|
|
Residential site developments
|
|
|
2,391
|
|
103
|
|
|
3,506
|
|
146
|
|
Multifamily
|
|
|
1,570
|
|
20
|
|
|
428
|
|
4
|
|
Lots
|
|
|
1,478
|
|
31
|
|
|
2,932
|
|
51
|
|
Commercial site
developments
|
|
|
350
|
|
6
|
|
|
366
|
|
6
|
|
Condominiums
|
|
|
-
|
|
-
|
|
|
2,252
|
|
9
|
|
Total
|
|
$
|
16,112
|
|
192
|
|
$
|
30,823
|
|
264
|
In addition to
OREO sales, the Bank also completed 19 short sales in 2012 for total proceeds of
$6.2 million. Short sales occur when we accept an agreement with a borrower to
sell the Bank's collateral on a loan that produces net proceeds that are less
than what is owed. The obligor receives no proceeds; however, the debt is fully
extinguished. A short sale is an alternative to foreclosure. The losses on short
sales and valuation adjustments on loans prior to taking property into OREO are
recorded directly to the allowance for loan losses.
40
Delinquencies.
Bancorp also
monitors delinquencies, defined as balances 30-89 days past due, not in
nonaccrual status, as an important indicator for future nonperforming assets.
Total delinquencies were $2.7 million or .18% of total loans at December 31,
2012, down from $4.3 million or .28% at December 31, 2011, and consistent with
$2.7 million or .18% at year end 2010. Delinquencies increased in the commercial
portfolio, but declined in both real estate mortgage and commercial real estate
categories. The amount of delinquencies and the percentage of categories or
total loans represented by delinquencies may increase or decrease by a fair
amount from period to period and not necessarily reflect a negative or positive
trend in the underlying credit quality of the loan portfolio.
The following table summarizes total delinquent loan balances by type of
loan for the periods shown:
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
% of
|
|
2011
|
|
% of
|
|
2010
|
|
% of
|
|
|
|
Amount
|
|
category
|
|
Amount
|
|
category
|
|
Amount
|
|
category
|
|
Commercial
|
|
$
|
1,528
|
|
|
0.59
|
%
|
|
$
|
683
|
|
|
0.23
|
%
|
|
$
|
52
|
|
|
0.02
|
%
|
|
Real
estate construction
|
|
|
-
|
|
|
0.00
|
%
|
|
|
-
|
|
|
0.00
|
%
|
|
|
-
|
|
|
0.00
|
%
|
|
Real estate mortgage
|
|
|
637
|
|
|
0.22
|
%
|
|
|
2,389
|
|
|
0.74
|
%
|
|
|
2,062
|
|
|
0.59
|
%
|
|
Commercial real estate
|
|
|
491
|
|
|
0.05
|
%
|
|
|
1,145
|
|
|
0.14
|
%
|
|
|
555
|
|
|
0.07
|
%
|
|
Installment and other consumer
|
|
|
6
|
|
|
0.05
|
%
|
|
|
56
|
|
|
0.41
|
%
|
|
|
52
|
|
|
0.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans 30-89 days past due,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
not in
nonaccrual status
|
|
$
|
2,662
|
|
|
|
|
|
$
|
4,273
|
|
|
|
|
|
$
|
2,721
|
|
|
|
|
|
|
|
Delinquent loans to total loans
|
|
|
0.18
|
%
|
|
|
|
|
|
0.28
|
%
|
|
|
|
|
|
0.18
|
%
|
|
|
|
41
Allowance for Credit Losses and Net
Loan Charge-offs
Allowance for Credit Losses.
An allowance for credit losses has been
established based on management’s best estimate, as of the balance sheet date,
of probable losses inherent in the loan portfolio. The actual losses may vary
significantly from the estimated amounts. For more information regarding the
Company’s allowance for credit losses, see the discussion under the subheading
“Allowance for Credit Losses” in the section “Critical Accounting Policies”
included in Item 7 of this report below. The allowance for credit losses is
comprised of two primary components: the allowance for loan losses, which is the
sum of the specific reserve, formula and unallocated allowance relating to loans
in the loan portfolio, and the reserve for unfunded commitments. Our methodology
for determining the allowance for credit losses consists of several key
elements, which include:
-
Specific Reserve Allowances.
Specific reserve allowances may be
established when management can estimate the amount of an impairment of a
loan, typically on a non real estate collateralized loan or to address the
unique risks associated with a group of loans or particular type of credit
exposure. The Company does not establish specific reserve allowances on
collateral dependent impaired loans. Impairment amounts related to these loans
are charged off to the allowance for credit losses when impairment is
established.
-
Formula Allowance.
The formula allowance is calculated by applying loss
factors to individual loans based on the assignment of risk ratings or through
the assignment of loss factors to homogenous pools of loans. Changes in risk
ratings of both performing and nonperforming loans affect the amount of the
formula allowance. Loss factors are based on our historical loss experience
and such other data as management believes to be pertinent, and may be
adjusted for significant factors that, in management’s judgment, affect the
collectability of the portfolio as of the evaluation date.
-
Unallocated Allowance.
The unallocated loan loss allowance
represents an amount for imprecision or uncertainty that is inherent in
estimates used to determine the allowance. In determining whether to carry an
unallocated allowance and, if so, the amount of the allowance, management
considers a variety of qualitative factors, including regional economic and
business conditions that impact important categories of our portfolio, loan
growth rates, the depth and skill of lending staff, the interest rate
environment, and the results of bank regulatory examinations and findings of
our internal credit analysts.
-
Reserve for Unfunded Commitments.
A reserve for unfunded commitments is
maintained at a level that, in the opinion of management, is adequate to
absorb probable losses associated with commitments to lend funds under
existing agreements; for example, the Bank’s commitment to fund advances under
lines of credit. The reserve amount for unfunded commitments is determined
based on our methodologies described above with respect to the formula
allowance. As our unfunded commitments decrease due to the transition to a
funded loan, the corresponding reserve for unfunded commitments will
decrease.
At December
31, 2012, the allowance for credit losses was $30.3 million or 2.03% of total
loans, consisting of a $25.2 million formula allowance, a $3.4 million
unallocated allowance, a $.8 million specific reserve allowance and a $.9
million reserve for unfunded commitments. The $.9 million specific reserve
allowance was maintained on performing, impaired loans considered to be troubled
debt restructurings that are on an interest accruing status. At December 31,
2012, within the formula allowance the Company had $.4 million allocated to
overdrafts. At December 31, 2011, the allowance for credit losses was $36.0
million or 2.40% of total loans, consisting of a $30.3 million formula
allowance, a $4.4 million unallocated allowance and a $.5 million specific
reserve allowance and a $.8 million reserve for unfunded commitments.
During 2012, we recorded a benefit for loan losses of $1.0 million and
total net charge-offs of $4.7 million. The reduction in the allowance for credit
loss principally reflected a lower risk profile of the loan portfolio at year
end 2012 compared to twelve months earlier.
Overall, we believe that the allowance for credit losses is adequate to
absorb losses in the loan portfolio at December 31, 2012. The process for
determining the adequacy of the allowance for credit losses is critical to our
financial results. It requires difficult, qualitative and complex judgments as a
result of the need to make estimates about the effect of matters that are
uncertain. Therefore, we cannot provide assurance that, in any particular
period, we will not have sizeable credit losses in relation to the amount
reserved. We may later need to significantly adjust the allowance for credit
losses considering factors in existence at such time, including economic,
market, or business conditions and the results of ongoing internal and external
examination processes.
42
Changes in the total allowance for credit losses for full
years ended December 31, 2008, through December 31, 2012, are presented in the
following table:
|
|
|
December
31,
|
|
(Dollars in thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
Loans outstanding at end of period
|
|
$
|
1,494,929
|
|
|
$
|
1,501,301
|
|
|
$
|
1 ,536,270
|
|
|
$
|
1,724,842
|
|
|
$
|
2 ,064,796
|
|
|
Average loans outstanding during the period
|
|
$
|
1,484,724
|
|
|
$
|
1,516,409
|
|
|
$
|
1
,622,445
|
|
|
$
|
1,914,975
|
|
|
$
|
2 ,146,870
|
|
|
|
|
Allowance for credit losses, beginning of
period
|
|
$
|
35,983
|
|
|
$
|
41,067
|
|
|
$
|
39,418
|
|
|
$
|
29,934
|
|
|
$
|
54,903
|
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(2,266
|
)
|
|
|
(3,393
|
)
|
|
|
(5,229
|
)
|
|
|
(22,411
|
)
|
|
|
(6,464
|
)
|
|
Commercial real estate construction
|
|
|
(150
|
)
|
|
|
(1,321
|
)
|
|
|
(811
|
)
|
|
|
(325
|
)
|
|
|
(1,422
|
)
|
|
Residential real estate construction
|
|
|
(446
|
)
|
|
|
(736
|
)
|
|
|
(2,211
|
)
|
|
|
(28,287
|
)
|
|
|
(10,105
|
)
|
|
Two-step residential construction
|
|
|
-
|
|
|
|
(31
|
)
|
|
|
(554
|
)
|
|
|
(6,963
|
)
|
|
|
(42,483
|
)
|
|
Total
real estate construction
|
|
|
(596
|
)
|
|
|
(2,088
|
)
|
|
|
(3,576
|
)
|
|
|
(35,575
|
)
|
|
|
(54,010
|
)
|
|
Mortgage
|
|
|
(1,090
|
)
|
|
|
(1,304
|
)
|
|
|
(4,654
|
)
|
|
|
(13,688
|
)
|
|
|
(4,847
|
)
|
|
Home equity
|
|
|
(1,641
|
)
|
|
|
(4,467
|
)
|
|
|
(2,807
|
)
|
|
|
(3,394
|
)
|
|
|
(249
|
)
|
|
Total real estate
mortgage
|
|
|
(2,731
|
)
|
|
|
(5,771
|
)
|
|
|
(7,461
|
)
|
|
|
(17,082
|
)
|
|
|
(5,096
|
)
|
|
Commercial real estate
|
|
|
(939
|
)
|
|
|
(2,526
|
)
|
|
|
(1,321
|
)
|
|
|
(5,383
|
)
|
|
|
(826
|
)
|
|
Installment and
consumer
|
|
|
(599
|
)
|
|
|
(539
|
)
|
|
|
(706
|
)
|
|
|
(840
|
)
|
|
|
(531
|
)
|
|
Overdraft
|
|
|
(714
|
)
|
|
|
(1,093
|
)
|
|
|
(1,183
|
)
|
|
|
(1,054
|
)
|
|
|
(1,328
|
)
|
|
Total loans charged
off
|
|
|
(7,845
|
)
|
|
|
(15,410
|
)
|
|
|
(19,476
|
)
|
|
|
(82,345
|
)
|
|
|
(68,255
|
)
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,144
|
|
|
|
1,336
|
|
|
|
1,073
|
|
|
|
1,005
|
|
|
|
203
|
|
|
Commercial real estate construction
|
|
|
4
|
|
|
|
88
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Residential real estate construction
|
|
|
130
|
|
|
|
190
|
|
|
|
697
|
|
|
|
44
|
|
|
|
-
|
|
|
Two-step residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
241
|
|
|
|
2,339
|
|
|
Total real estate
construction
|
|
|
134
|
|
|
|
278
|
|
|
|
697
|
|
|
|
285
|
|
|
|
2,339
|
|
|
Mortgage
|
|
|
244
|
|
|
|
139
|
|
|
|
252
|
|
|
|
12
|
|
|
|
38
|
|
|
Home equity
|
|
|
178
|
|
|
|
84
|
|
|
|
128
|
|
|
|
35
|
|
|
|
32
|
|
|
Total
real estate mortgage
|
|
|
422
|
|
|
|
223
|
|
|
|
380
|
|
|
|
47
|
|
|
|
70
|
|
|
Commercial real
estate
|
|
|
1,201
|
|
|
|
48
|
|
|
|
28
|
|
|
|
151
|
|
|
|
-
|
|
|
Installment and consumer
|
|
|
80
|
|
|
|
61
|
|
|
|
92
|
|
|
|
65
|
|
|
|
78
|
|
|
Overdraft
|
|
|
181
|
|
|
|
247
|
|
|
|
203
|
|
|
|
219
|
|
|
|
229
|
|
|
Total
recoveries
|
|
|
3,162
|
|
|
|
2,193
|
|
|
|
2,473
|
|
|
|
1,772
|
|
|
|
2,919
|
|
|
Net
loans charged off
|
|
|
(4,683
|
)
|
|
|
(13,217
|
)
|
|
|
(17,003
|
)
|
|
|
(80,573
|
)
|
|
|
(65,336
|
)
|
|
Provision for credit losses loans other than two-step loans
|
|
|
(983
|
)
|
|
|
8,101
|
|
|
|
18,098
|
|
|
|
83,756
|
|
|
|
30,867
|
|
|
Provision for credit losses
two-step loans
|
|
|
-
|
|
|
|
32
|
|
|
|
554
|
|
|
|
6,301
|
|
|
|
9,500
|
|
|
Total provision for credit losses
|
|
|
(983
|
)
|
|
|
8,133
|
|
|
|
18,652
|
|
|
|
90,057
|
|
|
|
40,367
|
|
|
Allowance for credit losses, end of period
|
|
$
|
30,317
|
|
|
$
|
35,983
|
|
|
$
|
41,067
|
|
|
$
|
39,418
|
|
|
$
|
29,934
|
|
|
|
|
Components of allowance for credit
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|
$
|
29,448
|
|
|
$
|
35,212
|
|
|
$
|
40,217
|
|
|
$
|
38,490
|
|
|
$
|
28,920
|
|
|
Reserve
for unfunded commitments
|
|
|
869
|
|
|
|
771
|
|
|
|
850
|
|
|
|
928
|
|
|
|
1,014
|
|
|
Total allowance for credit losses
|
|
$
|
30,317
|
|
|
$
|
35,983
|
|
|
$
|
41,067
|
|
|
$
|
39,418
|
|
|
$
|
29,934
|
|
|
|
|
Ratio of net loans charged off to
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans
outstanding
|
|
|
0.32
|
%
|
|
|
0.87
|
%
|
|
|
1.05
|
%
|
|
|
4.21
|
%
|
|
|
3.04
|
%
|
|
Ratio of allowance for loan losses to end
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
loans
|
|
|
1.97
|
%
|
|
|
2.35
|
%
|
|
|
2.62
|
%
|
|
|
2.23
|
%
|
|
|
1.40
|
%
|
|
Ratio of allowance for credit losses to end
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
loans
|
|
|
2.03
|
%
|
|
|
2.40
|
%
|
|
|
2.67
|
%
|
|
|
2.29
|
%
|
|
|
1.45
|
%
|
Net Loan Charge-offs.
During 2012, total net loan charge-offs were $4.7 million, a significant
decline from $13.2 million in 2011, and from $17.0 million in 2010. Net loan
charge-offs reflect the realization of net losses in the loan portfolio that
were recognized previously through the provision for credit losses. The total
net loan charge-off to total average loans outstanding was .32% for the year
ended 2012, down from .87% in 2011 and 1.05% in 2010. Net charge-offs decreased
in nearly all loan categories and commercial real estate recorded a net recovery
during 2012.
43
|
The following table summarizes net loan
charge-offs by type of loan for the periods
shown:
|
|
(Dollars in thousands)
|
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
Net loan charge-offs
|
|
% of average loan
|
|
Net loan
|
|
% of average loan
|
|
|
|
(recoveries)
|
|
category
|
|
charge-offs
|
|
category
|
|
Commercial
|
|
|
1,122
|
|
|
0.40
|
%
|
|
|
2,057
|
|
0.69
|
%
|
|
Commercial real estate
construction
|
|
|
146
|
|
|
0.52
|
%
|
|
|
1,233
|
|
7.39
|
%
|
|
Residential real estate construction
|
|
|
316
|
|
|
3.03
|
%
|
|
|
577
|
|
3.35
|
%
|
|
Total real estate construction
|
|
|
462
|
|
|
1.19
|
%
|
|
|
1,810
|
|
5.34
|
%
|
|
Mortgage
|
|
|
846
|
|
|
1.39
|
%
|
|
|
1,165
|
|
1.60
|
%
|
|
Home equity
|
|
|
1,463
|
|
|
0.59
|
%
|
|
|
4,383
|
|
1.66
|
%
|
|
Total real estate mortgage
|
|
|
2,309
|
|
|
0.75
|
%
|
|
|
5,548
|
|
1.65
|
%
|
|
Commercial real estate
|
|
|
(262
|
)
|
|
-0.03
|
%
|
|
|
2,478
|
|
0.30
|
%
|
|
Installment and consumer
|
|
|
519
|
|
|
4.44
|
%
|
|
|
478
|
|
3.67
|
%
|
|
Overdraft
|
|
|
533
|
|
|
56.94
|
%
|
|
|
846
|
|
64.99
|
%
|
|
Total loan net charge-offs
|
|
$
|
4,683
|
|
|
0.32
|
%
|
|
$
|
13,217
|
|
0.87
|
%
|
44
Deposits and
Borrowings
We
predominantly rely on customer deposits complemented by FHLB borrowings to fund
earning assets. The composition of our funding mix has and will continue to
depend on our funding needs, customer demand for various deposit products,
interest rate risk position, funding costs of the various alternatives, the
level and shape of the yield curve, collateral requirements for borrowings, the
relative cost and availability of other funding sources including government
lending or investment programs, and credit market conditions. Borrowings may be
used to manage short-term and long-term funding needs when they are less
expensive than deposits, or when necessary to adjust our interest rate risk
position.
The following table summarizes the average amount of, and the average
rate paid on, each of the deposit and borrowing categories for the periods
shown:
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
|
|
Percent
|
|
Rate
|
|
|
|
|
Percent
|
|
Rate
|
|
|
|
|
Percent
|
|
Rate
|
|
(Dollars in
thousands)
|
|
Average Balance
|
|
of total
|
|
Paid
|
|
Average
Balance
|
|
of total
|
|
Paid
|
|
Average
Balance
|
|
of total
|
|
Paid
|
|
Demand
|
|
$
|
647,323
|
|
34.2
|
%
|
|
-
|
|
|
$
|
592,630
|
|
30.6
|
%
|
|
-
|
|
|
$
|
540,280
|
|
26.7
|
%
|
|
-
|
|
|
Interest bearing
demand
|
|
|
368,284
|
|
19.5
|
%
|
|
0.03
|
%
|
|
|
362,334
|
|
18.7
|
%
|
|
0.06
|
%
|
|
|
335,134
|
|
16.5
|
%
|
|
0.13
|
%
|
|
Savings
|
|
|
130,365
|
|
6.9
|
%
|
|
0.05
|
%
|
|
|
112,385
|
|
5.8
|
%
|
|
0.11
|
%
|
|
|
103,531
|
|
5.1
|
%
|
|
0.27
|
%
|
|
Money
market
|
|
|
597,376
|
|
31.6
|
%
|
|
0.09
|
%
|
|
|
654,329
|
|
33.7
|
%
|
|
0.26
|
%
|
|
|
659,542
|
|
32.5
|
%
|
|
0.60
|
%
|
|
Total non-time
deposits
|
|
|
1,743,348
|
|
92.2
|
%
|
|
0.12
|
%
|
|
|
1,721,678
|
|
88.8
|
%
|
|
0.12
|
%
|
|
|
1,638,487
|
|
80.8
|
%
|
|
0.28
|
%
|
|
Time
deposits
|
|
|
147,713
|
|
7.8
|
%
|
|
0.68
|
%
|
|
|
217,149
|
|
11.2
|
%
|
|
1.34
|
%
|
|
|
388,500
|
|
19.2
|
%
|
|
1.92
|
%
|
|
Total deposits
|
|
|
1,891,061
|
|
100
|
%
|
|
0.09
|
%
|
|
|
1,938,827
|
|
100
|
%
|
|
0.26
|
%
|
|
|
2,026,987
|
|
100
|
%
|
|
0.60
|
%
|
|
|
|
Short-term borrowings
|
|
|
14,268
|
|
|
|
|
0.81
|
%
|
|
|
14,653
|
|
|
|
|
6.85
|
%
|
|
|
7,570
|
|
|
|
|
6.52
|
%
|
|
Long-term borrowings
1
|
|
|
162,671
|
|
|
|
|
1.50
|
%
|
|
|
197,584
|
|
|
|
|
6.05
|
%
|
|
|
257,019
|
|
|
|
|
3.75
|
%
|
|
Total borrowings
|
|
|
176,939
|
|
|
|
|
1.45
|
%
|
|
|
212,237
|
|
|
|
|
6.10
|
%
|
|
|
264,589
|
|
|
|
|
3.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits and borrowings
|
|
$
|
2,068,000
|
|
|
|
|
0.30
|
%
|
|
$
|
2,151,064
|
|
|
|
|
1.15
|
%
|
|
$
|
2,291,576
|
|
|
|
|
1.27
|
%
|
|
|
1
|
Long-term borrowings include junior subordinated
debentures.
|
Average total
deposits in 2012 decreased 2.5% or $47.8 million from 2011, and the average rate
paid on total deposits was .09% in 2012 a decline of 17 basis points from .26%
in 2011. The decrease in rates paid on long-term borrowings to 1.50% for 2012,
from 6.05% in 2011, was due to the $7.1 million prepayment charge associated
with the prepayment of $168.6 million in FHLB borrowings in 2011. While demand,
interest bearing demand, and savings deposit balances increased in 2012, higher
rate time deposits and money market deposit balances declined as the Company had
significant liquidity during the year.
Deposit funding obtained from depositors within our market area remains a
key strategic focus for us, and our marketing efforts are primarily focused on
long-term growth in business and consumer relationships with deposit accounts
and balances in lower cost categories such as demand deposits, interest bearing
demand, savings and money market accounts. Whether we will be successful
maintaining and growing our deposit base, and particularly our low cost deposit
base, will depend on various risk factors including deposit pricing, the effects
of changing product pricing and of competitive pricing pressure, changing
customer deposit behavior, regulatory changes, market interest rates and our
success in competing for deposits in uncertain economic and market conditions.
It is also uncertain how the expiration of the FDIC’s transaction account
guarantee (“TAG”) program at year end 2012 may impact deposit customers’
management of deposit balances in excess of FDIC’s deposit insurance coverage
effective January 1, 2013. Adverse developments with respect to any of these
risk factors could limit our ability to attract or retain deposits.
45
At December
31, 2012, the Company had brokered deposits of $.1 million, compared to $6.0
million in total brokered deposits at December 31, 2011, all of which were
wholesale brokered deposits for both periods. In the past, the company has had
both wholesale brokered deposits and reciprocal deposits arising out of the
Company’s participation in the Certificate of Deposit Account Registry Service
(“CDARS”) network. CDARS deposits are treated as brokered deposits for
regulatory purposes. While as of year end 2012, the Company had no plans to
replace matured brokered deposits, we may consider taking wholesale brokered
deposits and/or CDARS deposits in the future if management determines that it is
appropriate to maintain or grow our deposit funding base in such manner.
As of December 31, 2012, time deposits are presented below at the earlier
of the next repricing date or maturity:
|
|
|
|
|
Time deposits
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
of $100,000 or more
|
|
Other time deposits
|
|
Total time deposits
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Reprice/mature in 3 months
or less
|
|
$
|
13,683
|
|
32.9
|
%
|
|
$
|
19,524
|
|
21.8
|
%
|
|
$
|
33,207
|
|
25.5
|
%
|
|
Reprice/mature after 3 months through 6
months
|
|
|
6,539
|
|
15.7
|
%
|
|
|
18,403
|
|
20.7
|
%
|
|
|
24,942
|
|
19.1
|
%
|
|
Reprice/mature after 6
months through one year
|
|
|
10,735
|
|
25.8
|
%
|
|
|
26,386
|
|
29.7
|
%
|
|
|
37,121
|
|
28.4
|
%
|
|
Reprice/mature after one year through five
years
|
|
|
10,666
|
|
25.6
|
%
|
|
|
24,705
|
|
27.8
|
%
|
|
|
35,371
|
|
27.0
|
%
|
|
Reprice/mature after five
years
|
|
|
-
|
|
0.0
|
%
|
|
|
-
|
|
0.0
|
%
|
|
|
-
|
|
0.0
|
%
|
|
Total
|
|
$
|
41,623
|
|
100.0
|
%
|
|
$
|
89,018
|
|
100.0
|
%
|
|
$
|
130,641
|
|
100.0
|
%
|
Approximately
73% of our time deposits will mature and reprice in the next 12 months.
Historically, the Company has been able to retain and or expand time deposits by
increasing rates paid, which increases our funding cost when such strategies are
implemented. The level of time deposits in the future depends on customer
preferences for time deposits, market interest rates and the slope of the yield
curve, our need for deposit funding volume, customer perceptions of the Bank, as
well as the pricing required to retain and attract time deposits relative to
other funding alternatives including borrowings from the FHLB.
|
|
|
December 31,
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
2011
|
|
Time deposits less than $100,000
|
|
$
|
89,018
|
|
68
|
%
|
|
$
|
118,667
|
|
69
|
%
|
|
Time
deposits $100,000 to $250,000
|
|
|
30,984
|
|
24
|
%
|
|
|
37,357
|
|
21
|
%
|
|
Time deposits greater than
$250,000
|
|
|
10,639
|
|
8
|
%
|
|
|
17,093
|
|
10
|
%
|
|
Total time deposits
|
|
$
|
130,641
|
|
100
|
%
|
|
$
|
173,117
|
|
100
|
%
|
As shown
above, time deposits of $100,000 or more represented about 32% of total time
deposits at year end 2012, relatively unchanged from 2011.
As of December 31, 2012, long-term and short-term borrowings through the
FHLB had the following terms remaining to their contractual maturities:
|
(Dollars in thousands)
|
|
Due in three
|
|
Three months
|
|
Due after one
year
|
|
Due after
|
|
|
|
|
|
|
months or less
|
|
through one year
|
|
through five years
|
|
five years
|
|
Total
|
|
Short-term
borrowings
|
|
$
|
-
|
|
$
|
50,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
50,000
|
|
Long-term borrowings
1
|
|
|
-
|
|
|
-
|
|
|
70,000
|
|
|
7,900
|
|
|
77,900
|
|
Total borrowings
|
|
$
|
-
|
|
$
|
50,000
|
|
$
|
70,000
|
|
$
|
7,900
|
|
$
|
127,900
|
|
|
1
|
Based
on contractual maturities.
|
46
Average total
borrowings decreased $35.3 million in 2012 compared to 2011. This was largely
due to the prepayment of about $168.6 million of FHLB borrowings in the third
and fourth quarters of 2011, of which $120.0 million was re-borrowed. The Bank
is paying an interest rate of 1.05% on the new borrowings, which is down from
3.19% on the amount prepaid.
At December 31, 2012, six wholly-owned subsidiary grantor trusts
established by Bancorp had issued and sold $51.0 million of trust preferred
securities that remain outstanding. Trust preferred securities accrue and pay
distributions periodically at specified annual rates as provided in each
indenture. The trusts used all of the net proceeds from each sale of trust
preferred securities to purchase a like amount of junior subordinated debentures
of the Company. The junior subordinated debentures are the sole assets of the
trusts. The Company’s obligations under the junior subordinated debentures and
related documents, taken together, constitute a full and unconditional guarantee
by the Company of the obligations of the trusts. The trust preferred securities
are mandatorily redeemable upon the maturity of the junior subordinated
debentures and may be subject to earlier redemption as provided in the
indentures. The Company has the right to redeem the junior subordinated
debentures in whole (but not in part) on or after specific dates, at a
redemption price specified in the indentures plus any accrued but unpaid
interest to the redemption date.
The following table is a summary of outstanding trust preferred
securities at December 31, 2012:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
security
|
|
Rate
|
|
|
|
|
|
Rate at
|
|
|
|
Next possible
|
|
Issuance Trust
|
|
Issuance date
|
|
amount
|
|
type
1
|
|
Initial rate
|
|
|
12/31/12
|
|
Maturity date
|
|
redemption date
|
|
West Coast Statutory Trust
III
|
|
|
September 2003
|
|
$
|
7,500
|
|
Variable
|
|
|
6.75%
|
|
|
3.26%
|
|
September 2033
|
|
Currently
redeemable
|
|
West Coast Statutory Trust IV
|
|
|
March 2004
|
|
$
|
6,000
|
|
Variable
|
|
|
5.88%
|
|
|
3.10%
|
|
March 2034
|
|
Currently redeemable
|
|
West Coast Statutory Trust
V
|
|
|
April 2006
|
|
$
|
15,000
|
|
Variable
|
|
|
6.79%
|
|
|
1.74%
|
|
June 2036
|
|
Currently
redeemable
|
|
West Coast Statutory Trust VI
|
|
|
December 2006
|
|
$
|
5,000
|
|
Variable
|
|
|
7.04%
|
|
|
1.99%
|
|
December 2036
|
|
Currently redeemable
|
|
West Coast Statutory Trust
VII
|
|
|
March 2007
|
|
$
|
12,500
|
|
Variable
|
|
|
6.90%
|
|
|
1.86%
|
|
June 2037
|
|
Currently
redeemable
|
|
West Coast Statutory Trust VIII
|
|
|
June 2007
|
|
$
|
5,000
|
|
Variable
|
|
|
6.74%
|
|
|
1.69%
|
|
June 2037
|
|
Currently redeemable
|
|
|
|
|
Total
|
|
$
|
51,000
|
|
|
|
Weighted rate
|
|
2.17%
|
|
|
|
|
|
|
1
|
The
variable rate preferred securities reprice
quarterly.
|
The interest rates on all issued trust preferred securities
reset quarterly and are tied to the London Interbank Offered Rate (“LIBOR”)
rate. There were no purchases, redemptions, or maturities of trust preferred
securities in 2012. At December 31, 2012, Bancorp had no deferred interest on
its outstanding debentures. The average balance of junior subordinated
debentures in 2012 was $51.0 million, unchanged from 2011.
47
Capital Resources
The Federal
Reserve and the FDIC have established minimum requirements for capital adequacy
for bank holding companies and state non-member banks. For more information on
this topic, see the discussion under the subheading “Capital Adequacy
Requirements” in the section “Supervision and Regulation” included in Item 1 of
this report. The following table summarizes the capital measures of Bancorp and
the Bank at December 31, 2012:
|
|
|
|
Bank-level
|
|
(Dollars in thousands)
|
|
West Coast Bancorp
|
|
West Coast Bank
|
|
guideline
requirements
|
|
|
|
December
31,
|
|
December
31,
|
|
Adequately
|
|
Well
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Capitalized
|
|
Capitalized
|
|
Tier 1 risk-based capital ratio
|
|
|
20.66
|
%
|
|
|
19.36
|
%
|
|
|
19.95
|
%
|
|
|
18.66
|
%
|
|
4.00
|
%
|
|
6.00
|
%
|
|
Total risk-based capital ratio
|
|
|
21.83
|
%
|
|
|
20.62
|
%
|
|
|
21.20
|
%
|
|
|
19.92
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
|
Leverage ratio
|
|
|
15.60
|
%
|
|
|
14.61
|
%
|
|
|
15.07
|
%
|
|
|
14.09
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
|
|
|
Total stockholders' equity
|
|
$
|
339,220
|
|
|
$
|
314,479
|
|
|
$
|
376,826
|
|
|
$
|
352,187
|
|
|
|
|
|
|
|
Bancorp’s
total risk-based capital ratio improved to 21.83% at December 31, 2012, up from
20.62% at December 31, 2011. During 2012, Bancorp's Tier 1 risk-based capital
ratio increased to 20.66% from 19.36%, while its leverage ratio increased to
15.60% from 14.61%. The total capital ratio at the Bank improved to 21.20% at
December 31, 2012, from 19.92% at December 31, 2011, while the Bank’s Tier 1
capital ratio increased from 18.66% to 19.95% over the same period. The leverage
ratio at the Bank improved to 15.07% at December 31, 2012, from 14.09% at
December 31, 2011. Bancorp and the Bank capital ratios improved over year end
2011 principally as a result of 2012 operating profitability.
The total risk based capital ratios of Bancorp included $51.0 million of
junior subordinated debentures, all of which qualifies as Tier 1 capital at
December 31, 2012, and 2011, under guidance issued by the Federal Reserve. The
$51.0 million in junior subordinated debentures was grandfathered in as
qualifying for Tier 1 capital under the Dodd-Frank Act which specified that for
bank holding companies under $15.0 billion in total assets, debt and equity
instruments under certain conditions will qualify for Tier 1 treatment. Bancorp
expects to continue to principally rely on common equity to remain well
capitalized. The Company closely monitors and manages its equity and regulatory
capital position. Bancorp’s stockholders’ equity was $339.2 million at December
31, 2012, up from $314.5 million at December 31, 2011. Total equity increased by
$24.7 million in 2012 due primarily to net income of $23.5 million, and an
increase in unrealized gains on investment securities during the
year.
Bancorp believes its capital at the present time is sufficient and has no
current plan to raise additional capital. Notwithstanding this, Bancorp may take
steps to raise additional capital in the future, and the Company may offer and
issue equity, hybrid equity or debt instruments, including convertible preferred
stock or subordinated debt in that process. Any equity or debt financing, if
available at all, may be dilutive to existing shareholders or include covenants
or other restrictions that limit the Company’s activities.
48
Liquidity and Sources of Funds
The Bank’s
primary sources of funds include available cash, customer deposits, borrowing
from the FHLB, maturities of investment securities, sales of “Available for
Sale” securities, loan and OREO sales, loan repayments, net income, if any, and
loans taken out at the Federal Reserve discount window. Scheduled loan
repayments and investment securities maturities are a relatively stable source
of funds, while deposit inflows, loan and OREO sales and unscheduled loan
prepayments are not. Deposit inflows, loan and OREO sales and unscheduled loan
prepayments are influenced by general interest rate levels, interest rates
available on other investments, client behavior, competition, investment
alternatives, market and general economic factors.
Deposits are the primary source of new funds. Total deposits were $1.9
billion at December 31, 2012, relatively unchanged from year end 2011. Over the
past 12 months the Company’s loan to deposit ratio remained relatively unchanged
and measured 77% at December 31, 2012, as reductions in money market and time
deposit balances substantially offset increased noninterest bearing, interest
bearing, and savings account deposit balances while the loan portfolio remained
nearly unchanged from year end 2011. At December 31, 2012, the investment
securities portfolio was $772.1 million and represented 33% of total earning
assets. In light of the substantial liquidity position, a portion of which
carried a higher cost of funds than amounts being earned and therefore has an
adverse impact on net interest income and operating results, we reduced money
market and time deposits, including brokered deposits during 2012.
The following table summarizes the Bank’s primary liquidity, on balance
sheet liquidity, and net non-core funding dependency ratios for the periods
shown. The primary liquidity ratio represents the sum of net cash, short-term
and marketable assets and available borrowing lines divided by total deposits.
The on-balance sheet liquidity ratio consists of the sum of net cash, short-term
and marketable assets divided by total deposits. The net non-core funding
dependency ratio is non-core liabilities less short-term investments divided by
long-term assets. The Bank’s primary liquidity and on-balance sheet liquidity
ratio increased during 2012 and together with the net non-core funding
dependency were strong at December 31, 2012.
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
Primary
liquidity
|
52
|
%
|
|
45
|
%
|
|
On-balance sheet liquidity
|
30
|
%
|
|
26
|
%
|
|
Net non-core funding
dependency
|
5
|
%
|
|
6
|
%
|
At December
31, 2012, the Bank had outstanding borrowings of $127.9 million against its
$511.4 million in established borrowing capacity with the FHLB. The Bank’s
borrowing facility at year end 2012 was subject to collateral and stock
ownership requirements. Additionally, at December 31, 2012, the Bank had an
available discount window credit line with the Federal Reserve of approximately
$42.2 million with no balance outstanding. As with the other lines, each advance
under the credit arrangement with the Federal Reserve is subject to prior
Federal Reserve consent. For more information regarding the Company’s
outstanding borrowings, see Note 8 “Borrowings” to the Company’s audited
consolidated financial statements included under the section “Financial
Statements and Supplementary Data” in Item 8 of this report.
The holding company is a separate entity from the Bank and must provide
for its own liquidity. Substantially all of the holding company’s liquidity,
which is required to pay interest on Bancorp’s junior subordinated debentures,
shareholder cash dividends, if any, and other expenses, comes from dividends
declared and paid by the Bank. In addition, Bancorp may receive cash from the
exercise of options and the issuance of equity securities. At December 31, 2012,
the Bancorp did not have any borrowing arrangements of its own. As of June 27,
2012, the Written Agreement between Bancorp and the Federal Reserve and the DFCS
was terminated. At this time, the Federal Reserve 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. As of November 29, 2012, the MOU
between West Coast Bank, the FDIC and DFCS was terminated. At December 31, 2012,
the Bank has total equity of $376.8 million, of which $251.9 million is
restricted from transfer to the Parent Company in the form of a dividend.
Management expects to continue relying on customer deposits, cash flow
from investment securities, and sales of “Available for Sale” securities, as its
most important sources of liquidity. In addition, the Bank may from time to time
obtain additional liquidity from loan and OREO sales, loan repayments, federal
funds markets, brokered deposits, internet deposit listing services, the Federal
Reserve discount window, and other borrowings as well as from net income.
Borrowings may be used on a short-term and long-term basis to compensate for
reductions in other sources of funds. Borrowings may also be used on a long-term
basis to support expanded lending activities and to match maturities, duration,
or repricing intervals of assets. The sources of such funds may include, but are
not limited to, Federal Funds purchased, reverse repurchase agreements and
borrowings from the FHLB.
For more information on this topic, see the discussion under the section
“Risk Factors” included in Item 1A of this report.
49
Off Balance Sheet Arrangements
At December
31, 2012, the Bank had commitments to extend credit of $575.8 million, which was
up slightly from $574.3 million at December 31, 2011. For additional information
regarding off balance sheet arrangements and future financial commitments, see
Note 18 “Financial Instruments with Off Balance Sheet Risk” to the Company’s
audited consolidated financial statements included under the section “Financial
Statements and Supplementary Data” in Item 8 of this report. We are party to
many contractual financial obligations, including repayment of borrowings,
operating lease payments and commitments to extend credit.
The table below presents certain future financial obligations including
payments required under retirement plans which are included in “Other long-term
liabilities:”
|
|
|
Payments due within time period at December 31,
2012
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Due After Five
|
|
|
|
|
|
|
0-12 Months
|
|
1-3 Years
|
|
4-5 Years
|
|
Years
|
|
Total
|
|
Operating leases
1
|
|
$
|
4,106
|
|
$
|
6,986
|
|
$
|
4,538
|
|
$
|
6,104
|
|
$
|
21,734
|
|
Junior subordinated debentures
2
3
|
|
|
1,122
|
|
|
2,245
|
|
|
2,192
|
|
|
70,992
|
|
|
76,551
|
|
Long-term borrowings
3
|
|
|
985
|
|
|
60,738
|
|
|
10,994
|
|
|
8,096
|
|
|
80,813
|
|
Other long-term liabilities
|
|
|
1,448
|
|
|
164
|
|
|
167
|
|
|
432
|
|
|
2,211
|
|
Total
|
|
$
|
7,661
|
|
$
|
70,133
|
|
$
|
17,891
|
|
$
|
85,624
|
|
$
|
181,309
|
|
1
|
Operating leases do not include
increases in common area charges.
|
|
2
|
Junior subordinated debenture
obligations reflect contractual maturities which are 30 years from
origination and do not reflect possible call dates at the option of the
Company.
|
|
3
|
Long-term borrowings and junior
subordinated debenture obligations reflect interest payment obligations
based on December 31, 2012 contractual interest
rates.
|
50
Critical Accounting Policies
We have
identified our accounting policies related to our estimation of the allowance
for credit losses, valuation of other real estate owned (“OREO”), and estimates
relating to income taxes as policies that are most critical to an understanding
of our financial condition and operating results. Application of these policies
and calculation of these amounts involve difficult, subjective, and complex
judgments, and often involve estimates about matters that are inherently
uncertain. These policies are discussed in greater detail below, as well as in
Note 1 “Summary of Significant Accounting Policies” to the Company’s audited
consolidated financial statements included under the section “Financial
Statements and Supplementary Data” Item 8 of this report.
Allowance for Credit Losses.
Our methodology for establishing the allowance for credit losses
considers a series of risk factors, both quantitative and qualitative, to
reflect changes in the collectability of the portfolio not captured solely by
the historical loss data. These factors augment actual loss experience and help
to estimate the probability of loss within the loan portfolio based upon
emerging or inherent risk trends. Qualitative factors include concentration,
past due, non-accrual/adversely classified and troubled debt restructuring
trends. New products and expansion into new geographic regions can increase the
uncertainties in management’s evaluation of the factors that are part of
establishment of an allowance for credit losses that is believed to be adequate.
Changes in any of the above factors could have a significant effect on the
calculation of the allowance for credit losses in any given period. This
discussion should be read in conjunction with our audited consolidated financial
statements and related notes included in Item 8 of this report, and the section
“Allowance for Credit Losses and Net Loan Charge-offs” in this Item 7 of this
report.
Valuation of OREO.
The
Bank takes possession of OREO as part of its lending business, as real estate
serves as collateral for many of the Bank’s loans. OREO is initially recorded in
our financial statements at the lower of the carrying amount of the loan or fair
value of the property less the estimated costs to sell the property. Management
considers third party appraisals as well as independent fair market value
assessments from realtors or persons involved in selling OREO in determining the
fair value of particular properties. Accordingly, the valuation of OREO is
subject to significant external and internal judgment. If there is a difference
between management’s assessment of fair value less estimated cost to sell and
the carrying value of the loan at the date a particular property is transferred
into OREO, the difference is charged to the allowance for credit losses.
Thereafter, management periodically assesses its estimate of fair value, often
by means of new appraisals or reduction of property listing price. Any resulting
decreases in the fair value of OREO are considered valuation adjustments and
trigger a corresponding charge to the line item “Other real estate owned sales
and valuation adjustments and (loss) gain on sales” within total noninterest
income of the consolidated statements of income. At December 31, 2012, the Bank
had $16.1 million of OREO.
Income
Taxes.
We are subject to the income tax laws
of the United States and primarily the state of Oregon. We account for income
taxes using the asset and liability method in accordance with Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
740, “Income Taxes.” Our income tax benefit or expense is estimated and reported
in the Consolidated Statements of Income and includes both current and deferred
tax expense or benefits and reflects taxes to be paid or refunded for the
current period. Current taxes payable represent the Company’s expected federal
and state tax liability and are reported in other liabilities on the
consolidated balance sheets.
We determine our deferred income taxes using the balance sheet method,
under which the net deferred tax asset or liability is based on the tax effects
of the differences between the book and tax bases of assets and liabilities, and
changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense or benefit is recorded based on changes in deferred
tax assets and liabilities between periods. The Company records net deferred tax
assets to the extent these assets will more likely than not be realized. In
making the determination whether a deferred tax asset is more likely than not to
be realized, management seeks to evaluate all available positive and negative
evidence including the possibility of future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies
and recent financial results. A deferred tax asset valuation allowance is
established to reduce the net carrying amount of deferred tax assets if it is
determined to be more likely than not that all or some portion of the deferred
tax asset will not be realized.
A significant element of objective evidence is the Company’s demonstrated
return to profitability over consecutive quarters and positive projected
financial results. Based on its evaluation of the positive and negative
evidence, management determined it was appropriate to establish a deferred tax
asset valuation allowance of $21.0 million as of December 31, 2009, and an
allowance of $23.5 million as of December 31, 2010. Based on the analysis of
positive and negative evidence at December 31, 2011, including the Company’s
return to profitability over the prior six consecutive quarters, no deferred tax
asset valuation allowance was deemed necessary as of December 31, 2011. As a
result, the deferred tax asset valuation allowance of $23.5 million was fully
reversed in the fourth quarter of 2011.
The income tax laws of the jurisdictions in which we operate are complex
and subject to different interpretations. In establishing a provision for income
tax expense or benefit, we make judgments and interpretations about the
application of these complex tax laws. Our interpretations are subject to change
and may be subject to external review during examination by taxing authorities.
Disputes may arise over our tax positions. See Note 15 “Income Taxes” to the
Company’s audited consolidated financial statements included under the section
“Financial Statements and Supplementary Data” in Item 8 of this
report.
51
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Interest rate,
credit and operations risks are the most significant market risks impacting our
performance. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of our business
activities. We rely on loan reviews, prudent loan underwriting standards and an
adequate allowance for credit losses to mitigate credit risk. Interest rate risk
is reviewed at least quarterly by the Asset Liability Management Committee
(“ALCO”) which includes senior management representatives. The ALCO manages our
balance sheet to maintain net interest income and present value of equity within
acceptable ranges.
Asset/liability management simulation models are used to measure interest
rate risk. The models quantify interest rate risk by simulating forecasted net
interest income over a 12-month time horizon under various rate scenarios, as
well as monitoring the change in the present value of equity under the same rate
scenarios. The present value of equity is defined as the difference between the
market value of current assets less current liabilities. By measuring the change
in the present value of equity under different rate scenarios, management can
identify interest rate risk that may not be evident in simulating changes in
forecasted net interest income. Readers are referred to the sections, “Forward
Looking Statement Disclosure” and “Risk Factors” of this report in connection
with this discussion of market risks.
The following table shows the approximate percentage changes in
forecasted net interest income over a 12-month period and in the present value
of equity under several rate scenarios. For the net interest income analysis,
three rate scenarios are compared to a stable (unchanged from December 31, 2012)
rate scenario:
|
Stable rate scenario compared to:
|
Percent Change in Net
|
Percent Change in Net
|
|
|
Interest Income over a
|
Interest Income over a
|
|
|
twelve month period as
|
twelve month period as
|
|
|
of December 31, 2012
|
of December 31, 2011
|
|
Up 200 basis points
|
1.8%
|
2.5%
|
|
Up 100 basis points
|
.8%
|
1.4%
|
|
Down 100 basis points
|
-5.6%
|
-5.3%
|
As illustrated in the above table, we estimate our balance sheet was
slightly asset sensitive over a 12 month horizon at December 31, 2012, meaning
that interest earning assets are expected to mature or reprice more quickly than
interest-bearing liabilities in a given period. A decrease in market rates of
interest could adversely affect net interest income, in part due to cost of our
interest bearing liabilities already being very low, while an increase in market
rates may increase net interest income slightly. At December 31, 2011, we also
estimated that our balance sheet was slightly asset sensitive. We attempt to
limit our interest rate risk through managing the repricing characteristics of
our assets and liabilities.
For the present value of equity analysis, the results are compared to the
net present value of equity using the yield curve as of December 31, 2012. This
curve is then shifted up and down and the net present value of equity is
computed. The net present value of equity is the difference between the present
value of assets and the present value of liabilities. It is useful for assessing
longer term interest rate risk. This table does not include flattening or
steepening yield curve effects.
|
December 31, 2012
|
Percent Change in
|
|
Change in Interest Rates
|
Present Value of Equity
|
|
Up 200 basis points
|
-2.2%
|
|
Up 100 basis points
|
-3.2%
|
|
Down 100 basis points
|
-5.6%
|
It should be noted that the simulation model does not take into account
future management actions that could be undertaken should a change occur in
actual market interest rates during the year. Also, certain assumptions are
required to perform modeling simulations that may have a significant impact on
the results. These include important assumptions regarding the level of interest
rates and balance changes on deposit products that do not have stated
maturities, as well as the relationship between loan yields and deposit rates
relative to market interest rates. These assumptions have been developed through
a combination of industry standards and future expected pricing behavior but
could be significantly influenced by future competitor pricing behavior. The
model also includes assumptions about the composition of the balance sheet. The
results derived from the simulation model could vary significantly due to
external factors such as changes in the prepayment assumptions, early
withdrawals of deposits and competition. Any transaction activity will also have
an impact on the asset/liability position as new assets are acquired and added.
52
Interest Rate Sensitivity (Gap)
Table
The primary
objective of our asset/liability management is to maximize net interest income
while maintaining acceptable levels of interest-rate sensitivity. We seek to
meet this objective through influencing the maturity and repricing
characteristics of our assets and liabilities.
The following table sets forth the estimated maturity and repricing and
the resulting interest rate gap between interest earning assets and interest
bearing liabilities at December 31, 2012. The amounts in the table are derived
from internal Bank data regarding maturities and next repricing dates including
contractual repayments.
|
|
|
Estimated Maturity or Repricing at December 31,
2012
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After
|
|
|
|
|
|
|
|
|
0-3 Months
|
|
|
4-12 Months
|
|
|
1-5 Years
|
|
|
Five Years
|
|
|
Total
|
|
Interest Earning
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning balances due from banks
|
|
$
|
63,433
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
63,433
|
|
|
Federal funds
sold
|
|
|
4,059
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,059
|
|
|
Trading
assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Investments available
for sale
1 2
|
|
|
46,804
|
|
|
|
119,574
|
|
|
|
391,386
|
|
|
|
214,345
|
|
|
|
772,109
|
|
|
Loans
held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Loans, including
fees
|
|
|
515,933
|
|
|
|
216,245
|
|
|
|
631,278
|
|
|
|
131,473
|
|
|
|
1,494,929
|
|
|
Total interest earning assets
|
|
$
|
630,229
|
|
|
$
|
335,819
|
|
|
$
|
1,022,664
|
|
|
$
|
345,818
|
|
|
|
2,334,530
|
|
|
Allowance for loan
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,448
|
)
|
|
Cash
and due from banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,119
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,979
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,488,180
|
|
|
|
|
Interest Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, interest bearing demand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and money markets
3
|
|
$
|
24,955
|
|
|
$
|
65,630
|
|
|
$
|
246,311
|
|
|
$
|
756,178
|
|
|
$
|
1,093,074
|
|
|
Time deposits
|
|
|
33,209
|
|
|
|
62,062
|
|
|
|
35,370
|
|
|
|
-
|
|
|
|
130,641
|
|
|
Borrowings
2
|
|
|
-
|
|
|
|
50,000
|
|
|
|
70,000
|
|
|
|
7,900
|
|
|
|
127,900
|
|
|
Junior subordinated
debentures
|
|
|
51,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,000
|
|
|
Total interest bearing liabilities
|
|
$
|
109,164
|
|
|
$
|
177,692
|
|
|
$
|
351,681
|
|
|
$
|
764,078
|
|
|
|
1,402,615
|
|
|
Other
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
746,345
|
|
|
Total
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,148,960
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,220
|
|
|
Total liabilities & stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,488,180
|
|
|
|
|
Interest sensitivity
gap
|
|
$
|
521,065
|
|
|
$
|
158,127
|
|
|
$
|
670,983
|
|
|
$
|
(418,260
|
)
|
|
$
|
931,915
|
|
|
Cumulative interest sensitivity gap
|
|
$
|
521,065
|
|
|
$
|
679,192
|
|
|
$
|
1,350,175
|
|
|
$
|
931,915
|
|
|
|
|
|
|
Cumulative interest
sensitivity gap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as a percentage of total assets
|
|
|
21
|
%
|
|
|
27
|
%
|
|
|
54
|
%
|
|
|
37
|
%
|
|
|
|
|
1
Equity investments have
been placed in the 0-3 month category.
2
Repricing is based on anticipated call dates and may vary from contractual
maturities.
3
Repricing is based
on estimated average lives.
Certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, savings, interest bearing demand and money market deposit
accounts will very likely experience a change in deposit rates more frequently
than in their estimated average lives. Additionally, although certain assets and
liabilities may have similar maturities and periods of repricing, they may react
differently to changes in market interest rates and be impacted by loans that
have reached their floor. Also, interest rates on assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other assets and liabilities may follow changes in market interest rates.
Given these shortcomings, management believes that rate risk is best measured by
simulation modeling as opposed to measuring interest rate risk through interest
rate gap measurement.
53
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The following audited consolidated financial statements and
related documents are set forth in this Annual Report on Form 10-K on the pages
indicated:
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
|
55
|
|
CONSOLIDATED BALANCE SHEETS
|
56
|
|
CONSOLIDATED STATEMENTS OF INCOME
|
57
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
58
|
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
59
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
|
60
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
61
|
54
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
West Coast Bancorp
Lake Oswego, Oregon
We have audited the accompanying
consolidated balance sheets of West Coast Bancorp and subsidiaries (the
“Company”) as of December 31, 2012 and 2011, and the related consolidated
statements of income, comprehensive income, changes in stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2012.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial
position of West Coast Bancorp and subsidiaries as of December 31, 2012 and
2011, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2012, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December
31, 2012, based on the criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 8, 2013 expressed an unqualified opinion
on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
March 8, 2013
55
WEST COAST BANCORP
CONSOLIDATED
BALANCE SHEETS
|
As of December 31 (Dollars
and shares in thousands)
|
|
2012
|
|
2011
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Cash and due from
banks
|
|
$
|
70,119
|
|
|
$
|
59,955
|
|
|
Federal
funds sold
|
|
|
4,059
|
|
|
|
4,758
|
|
|
Interest-bearing deposits in
other banks
|
|
|
63,433
|
|
|
|
27,514
|
|
|
Total cash and cash equivalents
|
|
|
137,611
|
|
|
|
92,227
|
|
|
Investment securities available for sale, at fair value
|
|
|
|
|
|
|
|
|
|
(amortized cost: $756,480 and
$717,593, respectively)
|
|
|
772,109
|
|
|
|
729,844
|
|
|
Federal Home Loan Bank stock, held at
cost
|
|
|
11,932
|
|
|
|
12,148
|
|
|
Loans held for sale
|
|
|
-
|
|
|
|
3,281
|
|
|
Loans
|
|
|
1,494,929
|
|
|
|
1,501,301
|
|
|
Allowance for loan losses
|
|
|
(29,448
|
)
|
|
|
(35,212
|
)
|
|
Loans, net
|
|
|
1,465,481
|
|
|
|
1,466,089
|
|
|
Premises and equipment, net
|
|
|
21,948
|
|
|
|
24,374
|
|
|
Other real estate owned, net
|
|
|
16,112
|
|
|
|
30,823
|
|
|
Bank
owned life insurance
|
|
|
27,160
|
|
|
|
26,228
|
|
|
Other assets
|
|
|
35,827
|
|
|
|
44,873
|
|
|
Total assets
|
|
$
|
2,488,180
|
|
|
$
|
2,429,887
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
712,285
|
|
|
$
|
621,962
|
|
|
Savings
and interest bearing demand
|
|
|
524,031
|
|
|
|
495,117
|
|
|
Money market
|
|
|
569,043
|
|
|
|
625,373
|
|
|
Time
deposits
|
|
|
130,641
|
|
|
|
173,117
|
|
|
Total deposits
|
|
|
1,936,000
|
|
|
|
1,915,569
|
|
|
|
|
Short-term borrowings
|
|
|
50,000
|
|
|
|
-
|
|
|
Long-term borrowings
|
|
|
77,900
|
|
|
|
120,000
|
|
|
Junior subordinated debentures
|
|
|
51,000
|
|
|
|
51,000
|
|
|
Reserve for unfunded commitments
|
|
|
869
|
|
|
|
771
|
|
|
Other liabilities
|
|
|
33,191
|
|
|
|
28,068
|
|
|
Total liabilities
|
|
|
2,148,960
|
|
|
|
2,115,408
|
|
|
|
|
Commitments and contingent liabilities
(Notes 11 and 18)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock: no par value, 10,000 shares
authorized;
|
|
|
|
|
|
|
|
|
|
Series
B issued and outstanding: 121 at December 31, 2012 and December 31,
2011
|
|
|
21,124
|
|
|
|
21,124
|
|
|
Common stock: no par value, 50,000 shares
authorized;
|
|
|
|
|
|
|
|
|
|
issued
and outstanding: 19,293 at December 31, 2012 and 19,298 at December 31,
2011
|
|
|
232,202
|
|
|
|
230,966
|
|
|
Retained earnings
|
|
|
76,406
|
|
|
|
54,952
|
|
|
Accumulated other comprehensive
income
|
|
|
9,488
|
|
|
|
7,437
|
|
|
Total
stockholders' equity
|
|
|
339,220
|
|
|
|
314,479
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,488,180
|
|
|
$
|
2,429,887
|
|
See notes to consolidated financial
statements.
56
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
|
Years ended December 31 (Dollars and shares in thousands,
except per share amounts)
|
|
2012
|
|
2011
|
|
2010
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
75,139
|
|
|
$
|
80,237
|
|
|
$
|
88,409
|
|
|
Interest on taxable
investment securities
|
|
|
13,949
|
|
|
|
16,177
|
|
|
|
14,493
|
|
|
Interest on nontaxable investment
securities
|
|
|
2,112
|
|
|
|
2,074
|
|
|
|
2,175
|
|
|
Interest on deposits in
other banks
|
|
|
122
|
|
|
|
184
|
|
|
|
493
|
|
|
Interest on federal funds sold
|
|
|
2
|
|
|
|
3
|
|
|
|
6
|
|
|
Total interest income
|
|
|
91,324
|
|
|
|
98,675
|
|
|
|
105,576
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, interest bearing demand deposits
and money market
|
|
|
739
|
|
|
|
2,074
|
|
|
|
4,664
|
|
|
Time deposits
|
|
|
1,000
|
|
|
|
2,899
|
|
|
|
7,466
|
|
|
Short-term borrowings
|
|
|
115
|
|
|
|
1,004
|
|
|
|
494
|
|
|
Long-term
borrowings
|
|
|
1,236
|
|
|
|
3,626
|
|
|
|
6,176
|
|
|
Borrowings prepayment charge
|
|
|
-
|
|
|
|
7,140
|
|
|
|
2,326
|
|
|
Junior subordinated
debentures
|
|
|
1,206
|
|
|
|
1,178
|
|
|
|
1,143
|
|
|
Total interest expense
|
|
|
4,296
|
|
|
|
17,921
|
|
|
|
22,269
|
|
|
Net interest
income
|
|
|
87,028
|
|
|
|
80,754
|
|
|
|
83,307
|
|
|
Provision (benefit) for credit
losses
|
|
|
(983
|
)
|
|
|
8,133
|
|
|
|
18,652
|
|
|
Net interest income after
provision (benefit) for credit losses
|
|
|
88,011
|
|
|
|
72,621
|
|
|
|
64,655
|
|
|
|
|
NONINTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit
accounts
|
|
|
11,816
|
|
|
|
13,353
|
|
|
|
15,690
|
|
|
Payment systems related
revenue
|
|
|
12,246
|
|
|
|
12,381
|
|
|
|
11,393
|
|
|
Trust and investment services
revenue
|
|
|
4,700
|
|
|
|
4,503
|
|
|
|
4,267
|
|
|
Gains on sales of
loans
|
|
|
2,295
|
|
|
|
1,335
|
|
|
|
1,197
|
|
|
Other real estate owned valuation
adjustments and (loss) gain on sales
|
|
|
(2,813
|
)
|
|
|
(3,236
|
)
|
|
|
(4,415
|
)
|
|
Gain on securities,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of securities, net
|
|
|
375
|
|
|
|
713
|
|
|
|
1,562
|
|
|
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 gains on securities, net
|
|
|
326
|
|
|
|
534
|
|
|
|
1,562
|
|
|
Other noninterest income
|
|
|
3,257
|
|
|
|
2,949
|
|
|
|
3,003
|
|
|
Total noninterest income
|
|
|
31,827
|
|
|
|
31,819
|
|
|
|
32,697
|
|
|
|
|
NONINTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
45,743
|
|
|
|
48,587
|
|
|
|
45,854
|
|
|
Equipment
|
|
|
6,193
|
|
|
|
6,113
|
|
|
|
6,247
|
|
|
Occupancy
|
|
|
8,179
|
|
|
|
8,674
|
|
|
|
8,894
|
|
|
Payment systems related
expense
|
|
|
4,401
|
|
|
|
5,141
|
|
|
|
4,727
|
|
|
Professional fees
|
|
|
3,416
|
|
|
|
4,118
|
|
|
|
3,991
|
|
|
Postage, printing and
office supplies
|
|
|
2,910
|
|
|
|
3,265
|
|
|
|
3,148
|
|
|
Marketing
|
|
|
1,585
|
|
|
|
3,003
|
|
|
|
3,086
|
|
|
Communications
|
|
|
1,604
|
|
|
|
1,549
|
|
|
|
1,525
|
|
|
Merger-related expense
|
|
|
1,772
|
|
|
|
-
|
|
|
|
-
|
|
|
Other noninterest
expense
|
|
|
8,282
|
|
|
|
10,425
|
|
|
|
12,865
|
|
|
Total noninterest expense
|
|
|
84,085
|
|
|
|
90,875
|
|
|
|
90,337
|
|
|
|
|
INCOME BEFORE INCOME
TAXES
|
|
|
35,753
|
|
|
|
13,565
|
|
|
|
7,015
|
|
|
PROVISION (BENEFIT) FOR INCOME
TAXES
|
|
|
12,247
|
|
|
|
(20,212
|
)
|
|
|
3,790
|
|
|
NET INCOME
|
|
$
|
23,506
|
|
|
$
|
33,777
|
|
|
$
|
3,225
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.15
|
|
|
$
|
1.65
|
|
|
$
|
0.16
|
|
|
Diluted earnings per share
|
|
$
|
1.08
|
|
|
$
|
1.58
|
|
|
$
|
0.16
|
|
|
Weighted average common shares
|
|
|
19,086
|
|
|
|
19,007
|
|
|
|
17,460
|
|
|
Weighted average diluted shares
|
|
|
20,286
|
|
|
|
19,940
|
|
|
|
18,059
|
|
See notes to consolidated financial
statements.
57
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
Years ended December 31 (Dollars in thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
Net income
|
|
|
|
|
$
|
23,506
|
|
|
|
|
$
|
33,777
|
|
|
|
|
$
|
3,225
|
|
Other comprehensive income, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
arising during the year
|
|
3,704
|
|
|
|
|
|
11,920
|
|
|
|
|
|
4,766
|
|
|
|
|
|
Tax provision
|
|
(1,454
|
)
|
|
|
|
|
(4,695
|
)
|
|
|
|
|
(1,888
|
)
|
|
|
|
|
Unrealized holding gains
arising during the year, net of tax
|
|
2,250
|
|
|
|
|
|
7,225
|
|
|
|
|
|
2,878
|
|
|
|
|
|
|
|
Less: Reclassification
adjustment for net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other-than-temporary impairment losses on securities
|
|
49
|
|
|
|
|
|
179
|
|
|
|
|
|
-
|
|
|
|
|
|
Tax benefit
|
|
(19
|
)
|
|
|
|
|
(70
|
)
|
|
|
|
|
-
|
|
|
|
|
|
Net impairment losses on
securities, net of tax
|
|
30
|
|
|
|
|
|
109
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
Less: Reclassification
adjustment for net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains on sales of
securities
|
|
(375
|
)
|
|
|
|
|
(713
|
)
|
|
|
|
|
(1,562
|
)
|
|
|
|
|
Tax provision
|
|
146
|
|
|
|
|
|
277
|
|
|
|
|
|
609
|
|
|
|
|
|
Net realized gains, net of
tax
|
|
(229
|
)
|
|
|
|
|
(436
|
)
|
|
|
|
|
(953
|
)
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
2,051
|
|
|
|
|
|
6,898
|
|
|
|
|
|
1,925
|
|
Total comprehensive
income
|
|
|
|
|
$
|
25,557
|
|
|
|
|
$
|
40,675
|
|
|
|
|
$
|
5,150
|
See notes to consolidated financial
statements.
58
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Years ended December 31
(Dollars in thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
23,506
|
|
|
$
|
33,777
|
|
|
$
|
3,225
|
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
8,762
|
|
|
|
8,994
|
|
|
|
8,778
|
|
|
Amortization of tax credits
|
|
|
652
|
|
|
|
848
|
|
|
|
1,085
|
|
|
Deferred income tax provision (benefit)
|
|
|
6,410
|
|
|
|
(21,661
|
)
|
|
|
(2,540
|
)
|
|
Amortization of intangibles
|
|
|
-
|
|
|
|
358
|
|
|
|
279
|
|
|
Provision (benefit) for credit losses
|
|
|
(983
|
)
|
|
|
8,133
|
|
|
|
18,652
|
|
|
Decrease in accrued interest
receivable
|
|
|
824
|
|
|
|
158
|
|
|
|
892
|
|
|
Decrease (increase) in other assets
|
|
|
(179
|
)
|
|
|
1,801
|
|
|
|
29,993
|
|
|
Net other-than-temporary impairment losses
on securities
|
|
|
49
|
|
|
|
179
|
|
|
|
-
|
|
|
Gains on sales of securities, net
|
|
|
(375
|
)
|
|
|
(713
|
)
|
|
|
(1,562
|
)
|
|
Net loss on disposal of premises and
equipment
|
|
|
128
|
|
|
|
1,219
|
|
|
|
61
|
|
|
Net
other real estate owned valuation adjustments and loss (gain) on
sales
|
|
|
2,813
|
|
|
|
3,236
|
|
|
|
4,415
|
|
|
Gains on sale of loans
|
|
|
(1,457
|
)
|
|
|
(1,335
|
)
|
|
|
(1,197
|
)
|
|
Origination of loans held for sale
|
|
|
(9,510
|
)
|
|
|
(40,815
|
)
|
|
|
(34,927
|
)
|
|
Proceeds from sales of loans held for
sale
|
|
|
14,248
|
|
|
|
41,971
|
|
|
|
34,198
|
|
|
Increase (decrease) in interest payable
|
|
|
(43
|
)
|
|
|
(2,164
|
)
|
|
|
504
|
|
|
Increase (decrease) in other
liabilities
|
|
|
1,350
|
|
|
|
(1,024
|
)
|
|
|
1,294
|
|
|
Increase in cash surrender value of bank owned life
insurance
|
|
|
(932
|
)
|
|
|
(915
|
)
|
|
|
(896
|
)
|
|
Stock based compensation expense
|
|
|
1,545
|
|
|
|
1,899
|
|
|
|
2,089
|
|
|
Excess tax benefit associated with stock plans
|
|
|
(124
|
)
|
|
|
(66
|
)
|
|
|
-
|
|
|
Net
cash provided by operating activities
|
|
|
46,684
|
|
|
|
33,880
|
|
|
|
64,343
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of available for sale securities
|
|
|
226,932
|
|
|
|
298,490
|
|
|
|
288,050
|
|
|
Proceeds from sales of available for sale
securities
|
|
|
32,859
|
|
|
|
45,283
|
|
|
|
77,551
|
|
|
Purchase of available for sale securities
|
|
|
(304,028
|
)
|
|
|
(421,154
|
)
|
|
|
(449,665
|
)
|
|
Proceeds from redemption of Federal Home
Loan Bank stock
|
|
|
216
|
|
|
|
-
|
|
|
|
-
|
|
|
Loans made to customers less than principal collected on
loans
|
|
|
5,146
|
|
|
|
692
|
|
|
|
138,459
|
|
|
Purchase of loans
|
|
|
(8,255
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from the sale of other real estate owned
|
|
|
16,758
|
|
|
|
27,062
|
|
|
|
38,106
|
|
|
Capital expenditures on other real estate
owned
|
|
|
(160
|
)
|
|
|
(528
|
)
|
|
|
(3,234
|
)
|
|
Capital expenditures on premises and equipment
|
|
|
(876
|
)
|
|
|
(2,216
|
)
|
|
|
(2,265
|
)
|
|
Net
cash provided (used) by investing activities
|
|
|
(31,408
|
)
|
|
|
(52,371
|
)
|
|
|
87,002
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in demand, savings and interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing transaction
accounts
|
|
|
65,883
|
|
|
|
84,050
|
|
|
|
42,752
|
|
|
Net decrease in time deposits
|
|
|
(42,476
|
)
|
|
|
(102,294
|
)
|
|
|
(249,114
|
)
|
|
Proceeds from issuance of short-term borrowings
|
|
|
97,000
|
|
|
|
168,918
|
|
|
|
-
|
|
|
Repayment of short-term borrowings
|
|
|
(97,000
|
)
|
|
|
(208,118
|
)
|
|
|
(17,600
|
)
|
|
Proceeds from issuance of long-term borrowings
|
|
|
7,900
|
|
|
|
120,000
|
|
|
|
4,400
|
|
|
Repayment of long-term borrowings
|
|
|
-
|
|
|
|
(129,399
|
)
|
|
|
(81,500
|
)
|
|
Proceeds from secured borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
7,991
|
|
|
Proceeds from issuance of common
stock-Rights Offering
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
Costs of issuance of common stock-Rights Offering
|
|
|
-
|
|
|
|
-
|
|
|
|
(650
|
)
|
|
Proceeds from issuance of common
stock-Discretionary Program
|
|
|
-
|
|
|
|
-
|
|
|
|
7,856
|
|
|
Costs of issuance of common stock-Discretionary Program
|
|
|
-
|
|
|
|
-
|
|
|
|
(817
|
)
|
|
Activity in deferred compensation
plan
|
|
|
53
|
|
|
|
(27
|
)
|
|
|
262
|
|
|
Proceeds from issuance of common stock-stock options
|
|
|
151
|
|
|
|
80
|
|
|
|
4
|
|
|
Fractional share payment
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
-
|
|
|
Redemption of stock pursuant to stock plans
|
|
|
(501
|
)
|
|
|
(531
|
)
|
|
|
(35
|
)
|
|
Excess tax benefits associated with stock
plans
|
|
|
124
|
|
|
|
66
|
|
|
|
-
|
|
|
Cash
dividends paid
|
|
|
(1,026
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net
cash provided (used) by financing activities
|
|
|
30,108
|
|
|
|
(67,273
|
)
|
|
|
(276,451
|
)
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
|
|
45,384
|
|
|
|
(85,764
|
)
|
|
|
(125,106
|
)
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
92,227
|
|
|
|
177,991
|
|
|
|
303,097
|
|
|
CASH AND CASH EQUIVALENTS AT END OF
YEAR
|
|
$
|
137,611
|
|
|
$
|
92,227
|
|
|
$
|
177,991
|
|
See notes to consolidated financial
statements.
59
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
(Shares and dollars in thousands)
|
|
Preferred
|
|
Common Stock
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
|
|
Stock
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Income (Loss)
|
|
Total
|
|
BALANCE, January 1, 2010
|
|
139,248
|
|
|
3,128
|
|
|
$
|
93,246
|
|
|
$
|
17,950
|
|
|
$
|
(1,386
|
)
|
|
$
|
249,058
|
|
|
|
|
Net income
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
3,225
|
|
|
|
-
|
|
|
$
|
3,225
|
|
|
Other comprehensive income, net of tax:
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,925
|
|
|
|
1,925
|
|
|
Redemption of stock pursuant to stock
plans
|
|
-
|
|
|
(12
|
)
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(35
|
)
|
|
Conversion of Series A preferred stock
|
|
(118,124
|
)
|
|
14,288
|
|
|
|
118,124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Issuance of common stock-Rights
Offering,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of costs
|
|
|
|
|
1,000
|
|
|
|
9,350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,350
|
|
|
Issuance of common stock-Discretionary Program,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of costs
|
|
|
|
|
561
|
|
|
|
7,039
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,039
|
|
|
Activity in deferred compensation
plan
|
|
-
|
|
|
(3
|
)
|
|
|
262
|
|
|
|
-
|
|
|
|
-
|
|
|
|
262
|
|
|
Issuance of common stock-stock options
|
|
-
|
|
|
1
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
Issuance of common stock-restricted
stock
|
|
-
|
|
|
323
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Stock based compensation expense
|
|
-
|
|
|
-
|
|
|
|
2,089
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,089
|
|
|
Tax adjustment associated with stock
plans
|
|
-
|
|
|
-
|
|
|
|
(357
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(357
|
)
|
|
BALANCE, December 31, 2010
|
|
21,124
|
|
|
19,286
|
|
|
$
|
229,722
|
|
|
$
|
21,175
|
|
|
$
|
539
|
|
|
$
|
272,560
|
|
|
|
|
Net income
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
33,777
|
|
|
|
-
|
|
|
$
|
33,777
|
|
|
Other comprehensive income, net of tax
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,898
|
|
|
|
6,898
|
|
|
Redemption of stock pursuant to stock
plans
|
|
-
|
|
|
(55
|
)
|
|
|
(531
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(531
|
)
|
|
Activity in deferred compensation plan
|
|
-
|
|
|
(3
|
)
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
Issuance of common stock-stock
options
|
|
-
|
|
|
7
|
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80
|
|
|
Issuance of common stock-restricted stock
|
|
-
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Stock based compensation expense
|
|
-
|
|
|
-
|
|
|
|
1,899
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,899
|
|
|
Tax
adjustment associated with stock plans
|
|
-
|
|
|
-
|
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(159
|
)
|
|
Fractional share payment
|
|
-
|
|
|
(1
|
)
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(18
|
)
|
|
BALANCE, December 31, 2011
|
|
21,124
|
|
|
19,298
|
|
|
$
|
230,966
|
|
|
$
|
54,952
|
|
|
$
|
7,437
|
|
|
$
|
314,479
|
|
|
|
|
Net income
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
23,506
|
|
|
|
-
|
|
|
$
|
23,506
|
|
|
Other comprehensive income, net of tax
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,051
|
|
|
|
2,051
|
|
|
Cash dividends, $.10 per common
share
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,052
|
)
|
|
|
-
|
|
|
|
(2,052
|
)
|
|
Redemption of stock pursuant to stock plans
|
|
-
|
|
|
(47
|
)
|
|
|
(501
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(501
|
)
|
|
Activity in deferred compensation
plan
|
|
-
|
|
|
(1
|
)
|
|
|
53
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53
|
|
|
Issuance of common stock-stock options
|
|
-
|
|
|
13
|
|
|
|
151
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151
|
|
|
Issuance of common stock-restricted
stock
|
|
-
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Stock based compensation expense
|
|
-
|
|
|
-
|
|
|
|
1,545
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,545
|
|
|
Tax adjustment associated with stock
plans
|
|
-
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2012
|
|
21,124
|
|
|
19,293
|
|
|
$
|
232,202
|
|
|
$
|
76,406
|
|
|
$
|
9,488
|
|
|
$
|
339,220
|
|
See notes to consolidated financial
statements.
60
WEST COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of
Operations.
West Coast Bancorp (“Bancorp” or
“the Company”) provides a full range of financial services including lending and
depository services through West Coast Bank and its 58 branch banking offices in
Oregon and Washington. West Coast Trust Company, Inc. (“West Coast Trust”)
provides fiduciary, agency, trust and related services, and life insurance
products.
Principles of Consolidation.
The accompanying consolidated financial statements include the accounts
of Bancorp, and its wholly-owned subsidiaries, West Coast Bank (the “Bank”),
West Coast Trust and Totten, Inc., after elimination of material intercompany
transactions and balances. West Coast Statutory Trusts III, IV, V, VI, VII and
VIII are considered related parties to Bancorp and their financial results are
not consolidated in Bancorp’s financial statements. Junior subordinated
debentures issued by the Company to West Coast Statutory Trusts are included on
the Company’s consolidated balance sheets as junior subordinated debentures.
Basis of Financial Statement Presentation and the Use of
Estimates in the Financial Statements.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(“GAAP”) and with prevailing practices within the banking and securities
industries. Management is required to make certain estimates and assumptions
when preparing the financial statements that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and the amounts of income and expense for the
reporting period. Actual results could differ significantly from management’s
estimates. Certain material estimates subject to significant change relate to
the determination of the allowance for credit losses, the provision or benefit
for income taxes, and the fair value of investments and other real estate owned.
Immaterial reclassifications related to prior year amounts of Trading Securities
in the Balance Sheet have been made to conform to current
presentation and Statement of Cash Flows.
Subsequent Events.
The
Company has evaluated events and transactions for potential recognition or
disclosure through the date the financial statements were issued.
Cash and Cash Equivalents.
Cash and cash equivalents include cash on hand, interest bearing
deposits in other banks, amounts due from banks and federal funds sold.
Generally, federal funds are purchased or sold for one-day periods.
61
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Supplemental Cash Flow Information.
The following table presents supplemental cash flow information for the
years ended December 31, 2012, 2011, and 2010.
|
(Dollars in thousands)
|
December 31,
|
|
|
2012
|
|
2011
|
|
2010
|
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
Cash (received) paid in the year
for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
$
|
4,339
|
|
$
|
20,085
|
|
|
$
|
21,765
|
|
|
Income
taxes, net
|
|
6,470
|
|
|
6,550
|
|
|
|
(27,742
|
)
|
|
|
|
Noncash investing and
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized gain on available
|
|
|
|
|
|
|
|
|
|
|
|
for sale securities, net of tax
|
$
|
2,051
|
|
$
|
6,898
|
|
|
$
|
1,925
|
|
|
Dividends declared
and accrued in other liabilities
|
|
1,026
|
|
|
-
|
|
|
|
-
|
|
|
Sale of
SBA loans - transfer to other assets
|
|
-
|
|
|
-
|
|
|
|
7,991
|
|
|
Settlement of
secured borrowings
|
|
-
|
|
|
(3,085
|
)
|
|
|
(4,906
|
)
|
|
Transfer of long term debt to short term debt
|
|
50,000
|
|
|
39,200
|
|
|
|
5,000
|
|
|
OREO and premises
and equipment expenditures
|
|
|
|
|
|
|
|
|
|
|
|
accrued in other liabilities
|
|
29
|
|
|
111
|
|
|
|
74
|
|
|
Transfer of loans to OREO
|
|
4,700
|
|
|
21,139
|
|
|
|
25,199
|
|
Investment Securities Available for Sale.
Investment securities classified as available for sale are not
trading securities but may be sold before maturity in response to changes in the
Company’s interest rate risk profile, funding needs or demand for collateralized
deposits by public entities. Available for sale securities are carried at fair
value with unrealized gains and losses, net of any tax effect, reported within
accumulated other comprehensive income in stockholders’ equity. Premiums and
discounts are amortized or accreted over the estimated life of the investment
security as an adjustment to the yield. For purposes of computing realized gains
and losses, the cost of securities sold is determined using the specific
identification method. The Company analyzes investment securities for
other-than-temporary impairment (“OTTI”) on a quarterly basis. For equity
securities where declines in fair value are deemed other-than-temporary and the
Company does not have the ability and intent to hold the securities until
recovery, OTTI is recognized in noninterest income. The Company considers
whether a debt security will be sold or if it is likely to be required to be
sold prior to the recovery of any unrealized loss. Intent to sell or a
requirement to sell debt securities prior to recovery would result in
recognizing the entire impairment as OTTI in noninterest income. If the Company
does not intend to sell impaired debt securities, will not be required to sell
them prior to recovery, and the Company does not expect to recover its entire
amortized cost basis of the securities, the portion of impairment loss
specifically related to credit losses is recognized in noninterest income. The
portion of impairment loss related to all other factors is recognized as a
separate category in other comprehensive income.
Valuation of Investment Securities Available for
Sale.
Investment securities are valued
utilizing a number of methods including quoted prices in active markets, quoted
prices for similar assets, quoted prices for securities in inactive markets and
inputs derived principally from or corroborated by observable market data by
correlation or other means. In addition, certain investment securities are
valued based on the Company’s own assumptions using the best information
available using a discounted cash flow model.
Federal Home Loan Bank Stock.
Federal Home Loan Bank of Seattle (the “FHLB”) stock is carried at cost
which equals its par value because the shares can only be redeemed with the FHLB
at par and it lacks a market. The Bank is required to maintain a minimum level
of investment in FHLB stock based on specific percentages of its outstanding
mortgages and FHLB advances. Stock redemptions are at the discretion of the FHLB
or of the Company, upon prior notice to the FHLB of five years for FHLB B stock
or six months for FHLB A stock. The Bank considers FHLB stock a restricted
security. The Company periodically analyzes FHLB stock for OTTI. The evaluation
of OTTI on FHLB stock is based on an assessment of the ultimate recoverability
of cost rather than recognizing temporary declines in value. The determination
of whether a decline affects the ultimate recoverability of cost is influenced
by criteria such as (a) the significance of any decline in net assets of the
FHLB as compared to the capital stock amount for the FHLB and the length of time
this situation has persisted, (b) commitments by the FHLB to make payments
required by law or regulation and the level of such payments in relation to the
operating performance of the FHLB, (c) the impact of legislative and regulatory
changes on institutions and, accordingly, the customer base of the FHLB, and (d)
the liquidity position of the FHLB. The Company analyzed FHLB stock for OTTI and
concluded that no impairment exists at December 31, 2012.
62
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Loans Held
for Sale.
At December 31, 2011, loans held
for sale includes mortgage loans that are carried at the lower of cost or market
value. During the year ending December 31, 2012, the Company discontinued
funding mortgage loans that were sold on the secondary market. The Company
changed its business model to act as a direct broker between clients and third
party purchasers of mortgage loans. Fees for these services are recognized in
income when realized. The Company originates loans to customers under Small
Business Administration (“SBA”) programs that generally provide for SBA
guarantees of 50% to 85% of each loan. We periodically sell the guaranteed
portion of certain SBA loans to investors and retain the unguaranteed portion
and servicing rights in our loan portfolio. SBA loans are recorded and held
within the loan portfolio until designated to be sold. Gains on these sales are
earned through the sale of the guaranteed portion of the loan for an amount in
excess of the adjusted carrying value of the portion of the loan sold. We
allocate the carrying value of such loans between the portion sold, the portion
retained and a value assigned to the right to service the loan. The difference
between the adjusted carrying value of the portion retained and the face amount
of the portion retained is amortized to interest income over the life of the
related loan using a straight-line method over the anticipated lives of the pool
of SBA loans. We record a gain on sale of SBA loans at the date of transfer of
the loan.
Loans.
Loans are reported
at the amount of unpaid principal balance outstanding net of unearned income and
deferred fees and costs. Loan and commitment fees and certain direct loan
origination costs are deferred and recognized over the life of the loan and/or
commitment period as yield adjustments. Interest income on loans is accrued
daily on the unpaid principal balance outstanding as earned.
Nonaccrual Loans.
Loans
(including impaired loans) are placed on nonaccrual status when the collection
of interest or principal has become 90 days past due or is otherwise considered
doubtful. When a loan is placed on nonaccrual status, the Company stops accruing
interest and unpaid accrued interest is reversed. In addition, the Company stops
amortizing deferred fees and costs. For certain real estate construction loans
accrued unpaid interest as well as qualifying capitalized interest is reversed.
When management determines that the ultimate collectability of principal is in
doubt, cash receipts on nonaccrual loans are applied to reduce the principal
balance on a cash-basis method until the loans qualify for return to interest
accruing status. Loans are returned to interest accruing status when management
expects collection of contractual loan payments and the borrower has
demonstrated six months of compliance with the contractual terms of the loan.
63
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Impaired
Loans.
A loan is considered to be impaired
when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due (both interest and principal)
according to the contractual terms of the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows discounted at
the loan’s effective interest rate or, as a practical expedient, at the loan’s
observable market price or the fair market value of the collateral less selling
costs if the loan is collateral dependent. For loans that are collateral
dependent the Company charges off the amount of impairment at the time of
impairment, rather than placing the impaired loan amount in a specific reserve
allowance. Known impairments on non-real estate secured loans are charged off
immediately rather than recording a specific reserve allowance in the allowance
for loan losses.
Troubled Debt Restructurings.
A loan is accounted for as a troubled debt restructuring if the Company,
for economic or legal reasons related to the borrower’s financial difficulties,
grants a concession to the borrower that it would not otherwise consider. A
troubled debt restructuring typically involves a modification of terms such as a
reduction of the stated interest rate or face amount of the loan, a reduction of
accrued interest, or an extension of the maturity date(s) at a stated interest
rate lower than the current market rate for a new loan with similar risk.
Troubled debt restructurings are considered impaired loans and as such are
measured based on the present value of expected future cash flows discounted at
the loan’s effective interest rate or, as a practical expedient, at the loan’s
observable market price or the fair market value of the collateral less selling
costs if the loan is collateral dependent. Performing troubled debt
restructurings not on nonaccrual status are measured based on the present value
of expected future cash flows discounted at the loan’s effective interest rate
based on a current documented evaluation supporting management’s expectation of
performance.
Allowance for Credit Losses.
The allowance for credit losses is comprised of two components, the
allowance for loan losses and the reserve for unfunded commitments. The
allowance for loan losses is an estimation of losses incurred for outstanding
loan balances, while the reserve for unfunded commitments is based upon an
estimation of incurred loss for the portion of total loan commitments not yet
funded for the period reported.
The allowance for credit losses is based on management’s estimates.
Management determines the adequacy of the allowance for credit losses based on
evaluations of the loan portfolio, recent loss experience and other factors,
including economic conditions. The Company determines the amount of the
allowance for credit losses required for certain sectors based on relative risk
characteristics of the loan portfolio. Actual losses may vary from current
estimates. These estimates are reviewed periodically and, as adjustments become
necessary, are reported in earnings in the periods in which they become known.
The allowance for credit losses is increased by provisions for credit losses in
earnings. Loan charge-offs reduce the allowance while recoveries are credited to
the allowance.
Commitments to Extend Credit.
Unfunded loan commitments are generally related to providing credit
facilities to customers of the bank and are not actively traded financial
instruments. These unfunded commitments are disclosed as commitments to extend
credit in Note 18 “Financial Instruments with Off Balance Sheet Risk” in the
notes to consolidated financial statements.
Reserve for Unfunded Commitments.
As a component of allowance for credit losses, a reserve for
unfunded commitments is maintained at a level that, in the opinion of
management, is adequate to absorb losses associated with the Bank’s commitment
to lend funds under existing agreements such as letters or lines of credit or
construction loans. Management determines the adequacy of the reserve for
unfunded commitments based upon reviews of individual credit facilities, current
economic conditions, the risk characteristics of the various categories of
commitments as well as pooled commitments with similar risk characteristics and
other relevant factors. The reserve is based on estimates, and ultimate losses
may vary from the current estimates. These estimates are evaluated on a regular
basis and, as adjustments become necessary, they are reported in the provision
for credit losses in the income statement in the periods in which they become
known.
Other Real Estate Owned (“OREO”).
OREO is real property of which the Bank has taken possession
or that has been deeded to the Bank through a deed-in-lieu of foreclosure,
non-judicial foreclosure, judicial foreclosure or similar process in partial or
full satisfaction of a loan or loans. In addition, the Bank owns a closed branch
building that is considered OREO. OREO is initially recorded at the lower of the
carrying amount of the loan or fair value of the property less estimated costs
to sell. This amount becomes the property’s new basis. Management considers
third party appraisals as well as independent fair market value assessments from
realtors or persons involved in selling OREO in determining the fair value of
particular properties. Accordingly, the valuation of OREO is subject to
significant external and internal judgment. Management also reviews OREO at
least annually to determine whether the property continues to be carried at the
lower of its recorded book value or fair value, net of estimated costs to sell.
Any further OREO valuation adjustments or subsequent gains or losses on the
final disposition of OREO are charged to other real estate owned valuation
adjustments and (loss) gain on sales. Expenses from the maintenance and
operations of OREO are included in other noninterest expense in the statements
of income.
64
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Premises
and Equipment.
Premises and equipment are
stated at cost, less accumulated depreciation and amortization. Land is carried
at cost. Depreciation is computed on the straight-line method over the estimated
useful lives of the related assets. In general, furniture and equipment is
amortized over a useful life of 3 to 10 years, software and computer related
equipment is amortized over 3 to 5 years and buildings are amortized over
periods up to 40 years. Leasehold improvements are amortized over the life of
the related lease, or the life of the related assets, whichever is shorter.
Expenditures for major renovations and betterments of the Company’s premises and
equipment are capitalized. Improvements are capitalized and depreciated over
their estimated useful lives. Minor repairs, maintenance and improvements are
charged to operations as incurred. When property is replaced or otherwise
disposed of, the cost of such assets and the related accumulated depreciation
are removed from their respective accounts. Related gain or loss, if any, is
recorded in current operations.
Income Taxes.
Income
taxes are accounted for using the asset and liability method. Under this method,
a deferred tax asset or liability is determined based on the enacted tax rates
that will be in effect when the differences between the financial statement
carrying amounts and tax basis of existing assets and liabilities are expected
to be reported in Bancorp’s income tax returns. The deferred tax provision
(benefit) for the year is equal to the net change in the net deferred tax asset
from the beginning to the end of the year, less amounts applicable to the change
in value related to investment securities available for sale. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. The Company records net deferred tax assets to
the extent these assets will more likely than not be realized. In making such
determination, the Company assesses the available positive and negative evidence
including future reversals of existing taxable temporary differences, projected
future taxable income, tax planning strategies and recent financial results. A
deferred tax asset valuation allowance is established to reduce the net carrying
amount of deferred tax assets if it is determined to be more likely than not,
that all or some portion of the potential deferred tax asset will not be
realized. The Company’s accounting policy is to exclude deferred tax assets
related to unrealized losses on its available for sale debt securities as these
losses are expected to reverse and realization of the related deferred tax asset
is not dependent on future taxable income. The Company determined that no
deferred tax asset valuation allowance was required at December 31, 2012. It is
the Company’s accounting policy to include interest expense and penalties
related to income taxes as a component of provision (benefit) for income taxes.
See Note 15 “Income Taxes” of the notes to consolidated financial statements for
more detail.
Operating Segments.
Public enterprises are required to report certain information about their
operating segments in the financial statements. The basis for determining the
Company’s operating segments is the way in which management operates the
businesses. Bancorp has identified two reportable segments, “banking” and
“other” which include West Coast Trust. See Note 20 “Segment and Related
Information” of the notes to consolidated financial statements for more detail.
Trust Company Assets.
Assets (other than cash deposits) held by West Coast Trust in fiduciary
or agency capacities for its trust customers are not included in the
accompanying consolidated balance sheets, because such items are not assets of
West Coast Trust.
Borrowings.
Federal funds purchased and securities sold under agreements
to repurchase generally mature within one to four days from the transaction
date. Other short-term borrowed funds mature within one year from the date of
these financial statements. Long-term borrowed funds extend beyond one year and
are reclassed to short-term borrowings when the long term borrowed funds mature
within one year and there is no intent to refinance.
Earnings 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 that qualifies as a participating security. Basic earnings per share is
computed by dividing net income available to common shareholders by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is computed in the same manner as basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if certain shares issuable upon
exercise of options, warrants, conversion of preferred stock, and unvested
restricted stock were included unless those additional shares would have been
anti-dilutive. For the diluted earnings per share computation, the treasury
stock method is applied and compared to the two-class method and whichever
method results in a more dilutive impact was utilized to calculate diluted
earnings per share.
Service Charges on Deposit Accounts.
Service charges on deposit accounts primarily represent
monthly fees based on minimum balances or transaction-based fees. These fees are
recognized as earned or as transactions occur and services are
provided.
65
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Payment Systems Revenue.
Payment systems revenue includes interchange income from credit and debit
cards, annual fees, and other transaction and account management fees.
Interchange income is a fee paid by a merchant bank to the card-issuing bank
through the interchange network. Interchange fees are set by the credit card
associations and are based on cardholder purchase volumes. The Company records
interchange income as transactions occur. Transaction and account management
fees are recognized as transactions occur or services are provided, except for
annual fees, which are recognized over the applicable period. Volume-related
payments to partners and credit card associations and expenses for rewards
programs are also recorded within payment systems revenue. Payments to partners
and expenses related to rewards programs are recorded when earned by the partner
or customer.
Merchant processing services revenue consists principally of transaction
and account management fees charged to merchants for the electronic processing
of transactions, net of interchange fees paid to the credit card issuing bank,
card association assessments, and revenue sharing amounts, and are all
recognized at the time the merchant’s transactions are processed or other
services are performed. The Company may enter into revenue sharing agreements
with referral partners or in connection with purchases of merchant contracts
from sellers. The revenue sharing amounts are determined primarily on sales
volume processed or revenue generated for a particular group of merchants.
Merchant processing revenue also includes revenues related to point-of-sale
equipment recorded as sales when the equipment is shipped or as earned for
equipment rentals.
Trust and Investment Services Revenue.
Trust and investment management fees are recognized over the
period in which services are performed and are based on a percentage of the fair
value of the assets under management or administration, fixed based on account
type, or transaction-based fees.
New Accounting Pronouncements.
In April 2011, the Financial Accounting Standards Board (“FASB”) issued
guidance within the Accounting Standards Update (“ASU”) 2011-04, “Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP
and IFRSs”. This ASU amends existing guidance regarding the highest and best use
and valuation assumption by clarifying these concepts are only applicable to
measuring the fair value of nonfinancial assets. The ASU also clarifies that the
fair value measurement of financial assets and financial liabilities which have
offsetting market risks or counterparty credit risks that are managed on a
portfolio basis, when several criteria are met, can be measured at the net risk
position. Additional disclosures about Level 3 fair value measurements are
required including a quantitative disclosure of the unobservable inputs and
assumptions used in the measurement, a description of the valuation process in
place, and discussion of the sensitivity of fair value changes in unobservable
inputs and interrelationships about those inputs as well disclosure of the level
of the fair value of items that are not measured at fair value in the financial
statements but disclosure of fair value is required. ASU 2011-04 was effective
for the Company’s reporting period beginning after December 15, 2011, and has
been applied prospectively.
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income”. This ASU requires
an entity to provide information about the amounts reclassified out of
accumulated other comprehensive income by component and to present either on the
face of the statement where net income is presented, or in the notes,
significant amounts reclassified out of accumulated other comprehensive income
by the respective line items of net income, but only if the amount reclassified
is required to be reclassified to net income in its entirety in the same
reporting period. The amendments are effective for annual and interim reporting
periods beginning on or after December 15, 2012. The Company is currently in the
process of evaluating the ASU but does not expect it will have a material impact
on the Company’s consolidated financial statements.
66
2. INVESTMENT SECURITIES
The following
table presents the available for sale investment securities as of December 31,
2012, and 2011:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
Gross Gains
|
|
Gross Losses
|
|
Fair Value
|
|
U.S. Treasury
securities
|
|
$
|
200
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
200
|
|
U.S. Government agency securities
|
|
|
238,775
|
|
|
4,422
|
|
|
-
|
|
|
|
243,197
|
|
Corporate
securities
|
|
|
14,303
|
|
|
-
|
|
|
(5,165
|
)
|
|
|
9,138
|
|
Mortgage-backed securities
|
|
|
414,162
|
|
|
11,150
|
|
|
(199
|
)
|
|
|
425,113
|
|
Obligations of state and
political subdivisions
|
|
|
77,827
|
|
|
4,905
|
|
|
(53
|
)
|
|
|
82,679
|
|
Equity investments and other
securities
|
|
|
11,213
|
|
|
601
|
|
|
(32
|
)
|
|
|
11,782
|
|
Total
|
|
$
|
756,480
|
|
$
|
21,078
|
|
$
|
(5,449
|
)
|
|
$
|
772,109
|
|
|
|
(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 December
31, 2012, the estimated fair value of the investment portfolio was $772.1
million, an increase of $42.3 million or 5.8% from $729.8 million at year end
2011. The estimated net unrealized gain on the investment portfolio at December
31, 2012, was $15.6 million, or 2.0% of the total portfolio, compared to $12.3
million and 1.7% respectively, at year end 2011. During 2012, the net unrealized
gain on mortgage-backed securities increased $1.7 million to $11.0 million at
year end while the net unrealized gain on U.S. Government agency securities
increased $1.0 million to $4.4 million. The net unrealized gains in the
obligations of state and political subdivisions category remained relatively
unchanged from year end 2011. The unrealized loss on the corporate securities
portfolio declined $.7 million during 2012.
At December 31, 2012, the corporate securities portfolio included four
pooled trust preferred securities with amortized cost of $13.8 million and an
estimated fair market value of $8.6 million resulting in an estimated $5.2
million unrealized loss. This unrealized loss was associated with the decline in
market value since purchase of our investments in pooled trust preferred
securities issued by banks and insurance companies. Continued wide credit and
liquidity spreads contributed to the unrealized loss associated with these
securities. These pooled trust preferred securities are rated C or better by the
rating agencies that cover these securities and they have several features that
reduce credit risk, including seniority over certain tranches in the same pool
and the benefit of certain collateral coverage tests.
Gross realized gains on the sale of investment securities included in
earnings in 2012, 2011, and 2010 were $375,000, $1,022,000, and $1,562,000,
respectively. Gross realized losses were $309,000 in 2011 and there were no such
losses in 2012 and 2010.
Dividends on equity investments for the years 2012, 2011, and 2010 were
$90,000, $100,000, and $105,000, respectively.
67
2. INVESTMENT SECURITIES
During 2012,
in terms of amortized cost, we increased our investment securities balance by
$38.9 million principally due to our efforts to maintain relatively low cash
balances given the low market interest rates. The purchases over the past year
were primarily of U.S. Government agency securities portfolio with 3 to 5 year
maturities and municipal securities. The fair value of our U.S. Government
agency securities increased by $23.6 million in 2012 as part of our effort to
maintain liquidity and portfolio diversification as well as to provide
collateral for public funds and borrowing sources such as the FHLB.
Our mortgage-backed securities portfolio had a fair value of $425.1
million, a decrease of $3.6 million from $428.7 million a year ago. This segment
of our portfolio primarily consists of U.S. Government agency ten and fifteen
year fully amortizing mortgage-backed securities with limited extension risk.
This portfolio consisted of U.S. Agency backed mortgages with an amortized cost
of $361.7 million and U.S. Government backed mortgage securities with an
amortized cost of $52.5 million. Floating or adjustable rate securities
represented $9.0 million of this portfolio while the remainder consisted of
fixed rate securities. Ten and fifteen year pass-through mortgages with a
projected average life of 3.7 years represented the majority of fixed rate
securities within this portfolio. Mortgage backed securities are subject to
prepayment risk. Rising prepayments reduces the projected average life and
accelerates the amortization of premiums and therefore reduces the income from
this portfolio. At December 31, 2012, the bank owned no privately issued
mortgage backed securities.
Our portfolio of securities representing obligations of state and
political subdivisions had a fair value of $82.7 million, with an amortized cost
of $77.8 million, indicating a net unrealized gain of $4.9 million. At December
31, 2012, our equity and other investment securities had a fair value of $11.8
million and consisted of three investments in mutual fund shares and three
investments in government backed Housing and Urban Development (“HUD”) Bonds. In
addition to interest income, these investments provide the Bank with Community
Reinvestment Act (“CRA”) benefits. 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
|
|
December 31, 2012
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
U.S. Government agency securities
|
|
$
|
499
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
|
|
499
|
|
|
-
|
|
|
Corporate securities
|
|
|
-
|
|
|
-
|
|
|
|
8,638
|
|
|
(5,165
|
)
|
|
|
8,638
|
|
|
(5,165
|
)
|
|
Mortgage-backed securities
|
|
|
29,691
|
|
|
(122
|
)
|
|
|
8,404
|
|
|
(77
|
)
|
|
|
38,095
|
|
|
(199
|
)
|
|
Obligations of state and political subdivisions
|
|
|
5,013
|
|
|
(53
|
)
|
|
|
-
|
|
|
-
|
|
|
|
5,013
|
|
|
(53
|
)
|
|
Equity and other securities
|
|
|
793
|
|
|
(6
|
)
|
|
|
1,175
|
|
|
(26
|
)
|
|
|
1,968
|
|
|
(32
|
)
|
|
Total
|
|
$
|
35,996
|
|
$
|
(181
|
)
|
|
$
|
18,217
|
|
$
|
(5,268
|
)
|
|
$
|
54,213
|
|
$
|
(5,449
|
)
|
|
|
|
(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
|
)
|
There were six investment securities with a 12 month or greater
continuous unrealized loss in the investment portfolio at December 31, 2012,
with an amortized cost of $23.5 million and a total unrealized loss of $5.3
million. In comparison, at December 31, 2011, there were six investment
securities with a 12 month or greater continuous unrealized loss in the
investment portfolio, with a total unrealized loss of $5.9 million. The
unrealized loss on these investment securities was primarily due to continued
increased credit and liquidity spreads and an extension of expected cash flow
causing a decline in the fair market value of our pooled trust preferred
securities (corporate security category). The value of most of our securities
fluctuates as market interest rates change.
There were a total of 13 securities in Bancorp’s investment portfolio at
December 31, 2012, that have been in a continuous unrealized loss position for
less than 12 months, with an amortized cost of $36.2 million and a total
unrealized loss of $.2 million. At December 31, 2011, there were a total of
eight securities in Bancorp’s investment portfolio that have been in a
continuous unrealized loss position for less than 12 months, with an amortized
cost of $42.0 million and a total unrealized loss of $.2 million. The fair value
of these securities fluctuates as market interest rates change.
68
2. INVESTMENT SECURITIES
Management
reviews and evaluates the Company’s debt securities on an ongoing basis for the
presence of other-than-temporary impairment (“OTTI”). Our analysis takes into
consideration current market conditions, length and severity of impairment,
extent and nature of the change in fair value, issuer ratings, and whether or
not the Company intends to, or may be required to, sell debt securities before
recovering any unrealized losses.
In the second quarter of 2011, the Company recorded a credit related OTTI
charge of $.2 million pretax related to a pooled trust preferred security in our
investment portfolio which also was placed on nonaccrual status at the same
time. An additional credit related OTTI charge of $49,000 pretax relating to
this same security was deemed necessary in the first quarter of 2012. We do not
intend to sell this security, and it is not likely that we will be required to
sell this security, but we do not expect to recover the entire amortized cost
basis of the security. The amount of OTTI related to credit losses recognized in
earnings represents the amortized cost of the security that we do not expect to
recover and is based on the estimated cash flow expected from the security,
discounted by the estimated future coupon rates of the security. We estimate
cash flows based on the performance of the underlying collateral for the
security and the overall structure of the security. Factors considered in the
performance of underlying collateral include current default and deferral rates,
estimated future default, deferral and recovery rates, and prepayment rates.
Factors considered in the overall structure of the security include the impact
of the underlying collateral cash flow on debt coverage tests and subordination
levels. The remaining impairment on this security that is related to all other
factors is recognized in other comprehensive income. Given regulatory guidelines
on expectation of full payment of interest and principal as well as extended
principal in kind payments, this pooled trust preferred security was placed on
nonaccrual status. In addition, in October 2011 the Company placed another
pooled trust preferred security with principal in kind payments on nonaccrual
status. While this security had an impairment loss of $1.5 million at December
31, 2012, based on our projections of future interest and principal payments,
this security had no credit related OTTI as of December 31, 2012. At year end
2012, these securities were rated C or better by the rating agencies that cover
these securities. They have several features that reduce credit risk, including
seniority over certain tranches in the same pool and the benefit of certain
collateral coverage tests.
The following table presents a summary of the significant inputs utilized
to measure the other-than-temporary impairment related to credit losses
associated with the above pooled trust preferred security at December 31, 2012,
and 2011:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
December 31,
2011
|
|
Default Rate
|
|
0.75
|
%
|
|
0.75
|
%
|
|
Recovery Rate
|
|
15.00
|
%
|
|
15.00
|
%
|
|
Prepayments
|
|
1.00
|
%
|
|
1.00
|
%
|
|
Discount rate (coupon) range
|
|
3.11%-4.36
|
%
|
|
3.43%-4.77
|
%
|
The following table presents information about the securities with OTTI
losses for the years ended December 31, 2012, 2011, and 2010:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to date December
31,
|
|
|
2012
|
|
2011
|
|
2010
|
|
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
|
)
|
|
$
|
-
|
69
2. INVESTMENT SECURITIES
The
following table presents a tabular roll forward of the amount of credit related
OTTI recognized in earnings for years ended December 31, 2012, and 2011:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December
31,
|
|
|
|
2012
|
|
2011
|
|
Balance of net
other-than-temporary impairment losses on securities, beginning of
period
|
|
$
|
(179
|
)
|
|
$
|
-
|
|
|
Net
other-than-temporary impairment losses on securities in the
period
|
|
|
(49
|
)
|
|
|
(179
|
)
|
|
Balance of net
other-than-temporary impairment losses on securities, end of
period
|
|
$
|
(228
|
)
|
|
$
|
(179
|
)
|
At December 31, 2012, and 2011, the
Company had $287.1 million and $291.0 million, respectively, in investment
securities being provided as collateral to the FHLB, the Federal Reserve Bank of
San Francisco (the “Federal Reserve”), the State of Oregon and the State of
Washington, and others for our borrowings and certain public fund deposits. At
December 31, 2012, and December 31, 2011, Bancorp had no reverse repurchase
agreements.
The follow table presents the
maturities of the investment portfolio at December 31, 2012:
|
(Dollars in thousands)
|
|
Available for sale
|
|
|
|
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
|
|
|
100
|
|
|
102
|
|
After one year
through five years
|
|
|
176,545
|
|
|
180,243
|
|
After five
through ten years
|
|
|
62,130
|
|
|
62,852
|
|
Due after ten
years
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
238,775
|
|
|
243,197
|
|
|
|
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
|
|
|
8,638
|
|
Total
|
|
|
14,303
|
|
|
9,138
|
|
|
|
Obligations of state and
political subdivisions:
|
|
|
|
|
|
|
|
One year or
less
|
|
|
1,904
|
|
|
1,937
|
|
After one year
through five years
|
|
|
20,752
|
|
|
21,901
|
|
After five
through ten years
|
|
|
37,971
|
|
|
40,783
|
|
Due after ten
years
|
|
|
17,200
|
|
|
18,058
|
|
Total
|
|
|
77,827
|
|
|
82,679
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
331,105
|
|
|
335,214
|
|
|
|
Mortgage-backed
securities
|
|
|
414,162
|
|
|
425,113
|
|
Equity investments and
other securities
|
|
|
11,213
|
|
|
11,782
|
|
Total
securities
|
|
$
|
756,480
|
|
$
|
772,109
|
Mortgage-backed securities,
including collateralized mortgage obligations and asset-backed securities, have
maturities that will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
70
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
The following table presents the loan
portfolio as of December 31, 2012, and 2011:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
Commercial
|
|
$
|
259,333
|
|
|
$
|
299,766
|
|
|
Real estate construction
|
|
|
32,983
|
|
|
|
30,162
|
|
|
Real estate
mortgage
|
|
|
288,476
|
|
|
|
324,994
|
|
|
Commercial real estate
|
|
|
901,817
|
|
|
|
832,767
|
|
|
Installment and other
consumer
|
|
|
12,320
|
|
|
|
13,612
|
|
|
Total loans
|
|
|
1,494,929
|
|
|
|
1,501,301
|
|
|
Allowance for loan
losses
|
|
|
(29,448
|
)
|
|
|
(35,212
|
)
|
|
Total loans,
net
|
|
$
|
1,465,481
|
|
|
$
|
1,466,089
|
|
At
December 31, 2012, total loans decreased $6.4 million from the balance at
December 31, 2011. The declines within the loan portfolio principally occurred
in the commercial and real estate mortgage loan categories. The growth in the
commercial real estate portfolio nearly offset these declines. At December 31,
2012, and 2011, Bancorp had $1.7 million and $.8 million, respectively, of
overdrafts classified as loans in the installment and other consumer loan
category.
The Company has lending policies and
underwriting processes in place that are designed to make loans within an
acceptable level of risk for the estimated return. Management reviews and
approves these policies and processes on a regular basis. Management frequently
reviews reports related to loan production, loan quality, loan delinquencies and
nonperforming and potential problem loans. Diversification in the loan portfolio
is a means of managing risk associated with fluctuations in economic conditions.
Commercial loans are underwritten
after evaluating and understanding the borrower’s ability to operate profitably
and prudently execute its business. Underwriting standards are designed to
promote relationship banking rather than transactional banking. The Company’s
lending officers examine current and projected cash flows to determine the
ability of the borrower to repay their obligations as agreed. Commercial loans
are primarily made based on the identified cash flows of the borrower and
secondarily on the underlying collateral provided by the borrower. The cash
flows of borrowers, however, may not be as expected and the collateral securing
these loans may fluctuate in value. Management monitors and evaluates commercial
loans based on collateral, geography and risk rating criteria. Most commercial
loans are secured by the assets being financed or other business assets such as
accounts receivable or inventory and typically incorporate a personal guarantee;
however, some short-term loans may be made on an unsecured basis. In the case of
loans secured by accounts receivable, the availability of funds for the
repayment of these loans may be substantially dependent on the ability of the
borrower to collect amounts due from its customers.
Commercial real estate loans are
subject to underwriting standards and processes similar to commercial loans.
These loans are viewed primarily as cash flow loans and secondarily as loans
secured by real estate. Commercial real estate lending typically involves higher
loan principal amounts and the repayment of these loans is generally largely
dependent on the successful lease-up of the property securing the loan or the
business conducted on the property securing the loan. Commercial real estate
loans may be more adversely affected by conditions in the real estate markets or
in the general economy. Management monitors and evaluates commercial real estate
loans based on collateral, geography, and risk rating criteria. As a general
rule, the Company avoids financing single purpose projects unless other
underwriting factors are present to help mitigate risk. The Company also
utilizes third parties to provide insight and guidance about economic conditions
and trends affecting market areas it serves.
Our residential and commercial
construction portfolios are portfolios we consider to have higher risk.
Construction loans are underwritten utilizing independent appraisal reviews,
sensitivity analysis of absorption and lease rates financial analysis of the
developers, property owners, and investors as well as on a selective basis,
feasibility studies. Construction loans are generally based upon estimates of
costs and value associated with the complete project. Significant judgments and
estimates are made in the preparation of the financial statements and actual
results could differ from these estimates as future events occur. Construction
loans often involve the disbursement of substantial funds with repayment
substantially dependent on the success of the ultimate project. Sources of
repayment for these types of loans may be pre-committed permanent loans from the
Company or other approved third party long-term lenders, sales of developed
property or an interim loan commitment from the Company until permanent
financing is obtained. These loans are closely monitored by on-site inspections
and are considered to have higher risks than other real estate loans due to
their ultimate repayment being sensitive to interest rate changes, governmental
regulation of real property, pre-leasing that does not materialize, general
economic conditions, the availability of long-term financing, and completion of
construction within timelines and costs originally set forth.
71
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank
originates home equity loans and lines through an online application system in
which all applications are centrally reviewed with underwriting and
verifications completed by an experienced underwriter. Monthly loan portfolio
reports provide home equity loan performance monitoring. Credit risk is
minimized by accepting borrowers with a proven credit history, verified income
sources for repayment and owner occupied properties as acceptable collateral.
Portfolio balances, performance and underwriting standards can be influenced by
regional economic cycles related to unemployment levels, de-leveraging by
borrowers, and market values for residential properties.
The Company originates consumer
loans utilizing a computer-based credit scoring analysis to supplement the
underwriting process. To monitor and manage consumer loan risk, policies and
procedures are developed and modified, as needed, jointly by line and staff
personnel. This activity, coupled with relatively small loan amounts that are
spread across many individual borrowers, minimizes risk. Additionally, trend and
outlook reports are reviewed by management on a regular basis.
The Company maintains credit
administration and credit review functions that are designed to help confirm our
credit standards are being followed. Significant findings and periodic reports
are communicated to the Chief Credit Officer and Chief Executive Officer and, in
certain cases, to the Loan, Investment & Asset/Liability Committee, which is
comprised of certain directors. The loan review process complements and
reinforces the risk identification and assessment decisions made by lenders and
credit personnel, as well as the Company’s policies and procedures.
Loans greater than 90 days past due
are classified into nonaccrual status. The following table presents an age
analysis of the loan portfolio as of December 31, 2012, and 2011:
|
(Dollars in thousands)
|
|
December 31, 2012
|
|
|
|
30 - 89 days
|
|
Greater than
|
|
Total
|
|
Current
|
|
Total
|
|
|
|
past due
|
|
90 days past due
|
|
past due
|
|
loans
|
|
loans
|
|
Commercial
|
|
$
|
2,988
|
|
$
|
1,283
|
|
$
|
4,271
|
|
$
|
255,062
|
|
$
|
259,333
|
|
Real estate construction
|
|
|
-
|
|
|
1,337
|
|
|
1,337
|
|
|
31,646
|
|
|
32,983
|
|
Real estate
mortgage
|
|
|
2,605
|
|
|
2,729
|
|
|
5,334
|
|
|
283,142
|
|
|
288,476
|
|
Commercial real estate
|
|
|
1,407
|
|
|
3,404
|
|
|
4,811
|
|
|
897,006
|
|
|
901,817
|
|
Installment and other
consumer
|
|
|
6
|
|
|
1
|
|
|
7
|
|
|
12,313
|
|
|
12,320
|
|
Total
|
|
$
|
7,006
|
|
$
|
8,754
|
|
$
|
15,760
|
|
$
|
1,479,169
|
|
$
|
1,494,929
|
|
|
|
(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
|
72
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
The following table presents an
analysis of impaired loans as of December 31, 2012, and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
(Dollars in thousands)
|
|
December 31, 2012
|
|
December 31, 2012
|
|
|
|
Unpaid principal
|
|
Impaired loans
|
|
Impaired loans
|
|
Total impaired
|
|
Related
|
|
Average
impaired
|
|
|
|
balance
1
|
|
with no allowance
|
|
with allowance
|
|
loan balance
|
|
allowance
|
|
loan balance
|
|
Commercial
|
|
$
|
16,640
|
|
$
|
4,313
|
|
$
|
481
|
|
$
|
4,794
|
|
$
|
19
|
|
$
|
6,648
|
|
Real estate construction
|
|
|
4,381
|
|
|
1,336
|
|
|
-
|
|
|
1,336
|
|
|
-
|
|
|
4,920
|
|
Real estate
mortgage
|
|
|
26,122
|
|
|
9,776
|
|
|
4,601
|
|
|
14,377
|
|
|
82
|
|
|
15,506
|
|
Commercial real estate
|
|
|
23,401
|
|
|
9,659
|
|
|
12,210
|
|
|
21,869
|
|
|
729
|
|
|
22,762
|
|
Installment and other
consumer
|
|
|
2,237
|
|
|
-
|
|
|
81
|
|
|
81
|
|
|
20
|
|
|
100
|
|
Total
|
|
$
|
74,193
|
|
$
|
25,084
|
|
$
|
17,373
|
|
$
|
42,457
|
|
$
|
850
|
|
$
|
49,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
(Dollars in thousands)
|
|
December 31, 2011
|
|
December 31, 2011
|
|
|
|
Unpaid principal
|
|
Impaired loans
|
|
Impaired loans
|
|
Total impaired
|
|
Related
|
|
Average
impaired
|
|
|
|
balance
1
|
|
with no allowance
|
|
with allowance
|
|
loan balance
|
|
allowance
|
|
loan balance
|
|
Commercial
|
|
$
|
18,736
|
|
$
|
7,750
|
|
$
|
224
|
|
$
|
7,974
|
|
$
|
1
|
|
$
|
10,504
|
|
Real estate construction
|
|
|
9,716
|
|
|
5,823
|
|
|
41
|
|
|
5,864
|
|
|
-
|
|
|
8,405
|
|
Real estate
mortgage
|
|
|
30,732
|
|
|
11,949
|
|
|
6,779
|
|
|
18,728
|
|
|
329
|
|
|
20,892
|
|
Commercial real estate
|
|
|
25,426
|
|
|
15,070
|
|
|
8,604
|
|
|
23,674
|
|
|
173
|
|
|
25,969
|
|
Installment and other
consumer
|
|
|
1,812
|
|
|
5
|
|
|
175
|
|
|
180
|
|
|
-
|
|
|
54
|
|
Total
|
|
$
|
86,422
|
|
$
|
40,597
|
|
$
|
15,823
|
|
$
|
56,420
|
|
$
|
503
|
|
$
|
65,824
|
|
1
|
The unpaid principal balance on impaired loans represents the
amount owed by the borrower. The carrying value of impaired loans is lower
than the unpaid principal balance due to
charge-offs.
|
At
December 31, 2012, and 2011, Bancorp’s recorded investment in loans that were
considered to be impaired was $42.5 million and $56.4 million, respectively. A
loan is considered to be impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due
including both interest and principal according to the contractual terms of the
loan agreement. For loans that are collateral dependent, the Company charges off
the amount of impairment at the time of impairment. At December 31, 2012, a
specific reserve allowance in the amount of $.8 million was established related
to $17.4 million of impaired loans which were considered to be troubled debt
restructurings (“TDR”) that were on interest accruing status, compared to a
specific reserve allowance in the amount of $.5 million established related to
$15.8 million of impaired loans which were considered to be troubled debt
restructurings and were on an interest accruing status at December 31, 2011.
Troubled debt restructuring nonaccrual loan balances were $11.4 million and
$21.8 million at December 31, 2012, and 2011, respectively, which are included
in total nonaccrual loans.
The average recorded investment in
impaired loans for the years ended December 31, 2012, 2011, and 2010, was
approximately, $49.9 million, $65.8 million and $78.0 million, respectively. For
the years ended December 31, 2012, 2011, and 2010, interest income recognized on
impaired loans totaled $999,000, $1,035,000, and $568,000, respectively.
73
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
A loan is
accounted for as a TDR if the Company, for economic or legal reasons related to
the borrower’s financial difficulties, grants a concession to the borrower that
it would not otherwise consider granting. A TDR typically involves a
modification of terms such as a reduction of the stated interest rate or face
amount of the loan, a reduction of accrued interest, or an extension of the
maturity date(s) at a stated interest rate lower than the current market rate
for a new loan with similar risk.
The following table presents an
analysis of TDRs for the periods ended December 31, 2012, and 2011:
|
(Dollars in
thousands)
|
|
TDRs
recorded for the twelve months ending
|
|
TDRs
recorded in the twelve months prior to December 31, 2012 that
|
|
|
|
December 31, 2012
|
|
subsequently
defaulted in the twelve months ending December 31, 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
|
|
5
|
|
$
|
930
|
|
$
|
908
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Real estate
construction
|
|
1
|
|
|
1,795
|
|
|
1,795
|
|
-
|
|
|
-
|
|
|
-
|
|
Real
estate mortgage
|
|
2
|
|
|
229
|
|
|
110
|
|
-
|
|
|
-
|
|
|
-
|
|
Commercial real
estate
|
|
3
|
|
|
854
|
|
|
854
|
|
-
|
|
|
-
|
|
|
-
|
|
Consumer loans
|
|
-
|
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
11
|
|
$
|
3,808
|
|
$
|
3,667
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
(Dollars in
thousands)
|
|
TDRs
recorded for the twelve months ending
|
|
TDRs
recorded in the twelve months prior to December 31, 2011 that
|
|
|
|
December 31, 2011
|
|
subsequently
defaulted in the twelve months ending December 31, 2011
|
|
|
|
Number of
|
|
Pre-TDR outstanding
|
|
Post-TDR outstanding
|
|
Number of
|
|
Pre-TDR outstanding
|
|
|
|
|
|
loans
|
|
recorded investment
|
|
recorded investment
|
|
loans
|
|
recorded
investment
|
|
Amount Defaulted
|
|
Commercial
|
|
11
|
|
$
|
949
|
|
$
|
949
|
|
2
|
|
$
|
115
|
|
$
|
97
|
|
Real estate
construction
|
|
1
|
|
|
744
|
|
|
744
|
|
-
|
|
|
-
|
|
|
-
|
|
Real
estate mortgage
|
|
9
|
|
|
2,653
|
|
|
2,653
|
|
1
|
|
|
59
|
|
|
49
|
|
Commercial real
estate
|
|
7
|
|
|
1,603
|
|
|
1,520
|
|
1
|
|
|
374
|
|
|
374
|
|
Consumer loans
|
|
3
|
|
|
225
|
|
|
225
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
31
|
|
$
|
6,174
|
|
$
|
6,091
|
|
4
|
|
$
|
548
|
|
$
|
520
|
For TDRs that are collateral
dependent, the Company charges off the amount of impairment at the time of
impairment, rather than creating a specific reserve allowance for the impaired
amount. TDRs that are performing and on an interest accruing status are measured
for impairment based on the present value of expected future cash flows
discounted at the loan’s effective interest rate. Impairment resulting from this
measurement is recorded as a specific reserve allowance in the allowance for
credit losses.
The following table presents
nonaccrual loans by category as of December 31, 2012, and 2011:
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
2011
|
|
Commercial
|
|
$
|
4,313
|
|
$
|
7,750
|
|
Real estate construction
|
|
|
1,336
|
|
|
5,823
|
|
Real estate
mortgage
|
|
|
9,776
|
|
|
11,949
|
|
Commercial real estate
|
|
|
9,659
|
|
|
15,070
|
|
Installment and other
consumer
|
|
|
-
|
|
|
5
|
|
Total loans on nonaccrual status
|
|
$
|
25,084
|
|
$
|
40,597
|
Loans on which the accrual of
interest has been discontinued were approximately $25.1 million, $40.6 million
and $61.2 million at December 31, 2012, 2011, and 2010, respectively. Interest
income foregone on nonaccrual loans was approximately $3.4 million, $4.1 million
and $6.5 million in 2012, 2011, and 2010, respectively.
74
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
The
Company uses a risk rating matrix to assign a risk rating to loans not evaluated
on a homogenous pool level. At December 31, 2012, $1.13 billion of loans were
risk rated and $362.1 million were evaluated on a homogeneous pool basis.
Individually risk rated loans are rated on a scale of 1 to 10. A description of
the general characteristics of the 10 risk ratings is as follows:
-
Ratings 1, 2 and 3 - These ratings include loans
to very high credit quality borrowers of investment or near investment grade.
These borrowers have significant capital strength, moderate leverage, stable
earnings and growth, and readily available financing alternatives. Smaller
entities, regardless of strength, would generally not fit in these ratings.
These ratings also include loans that are collateralized by U. S. Government
securities and certificates of deposits.
-
Rating 4 - These ratings include loans to
borrowers of solid credit quality with moderate risk. Borrowers in these
ratings are differentiated from higher ratings on the basis of size (capital
and/or revenue), leverage, asset quality and the stability of the industry or
market area.
-
Ratings 5 and 6 - These ratings include “pass
rating” loans to borrowers of acceptable credit quality and risk. Such
borrowers are differentiated from Rating 4 in terms of size, secondary sources
of repayment or they are of lesser stature in other key credit metrics in that
they may be over-leveraged, undercapitalized, inconsistent in performance or
in an industry or an economic area that is known to have a higher level of
risk, volatility, or susceptibility to weaknesses in the economy. However, no
material adverse trends are evident with borrowers in these pass ratings.
-
Rating 7 - This rating includes loans on
management’s “watch list” and is intended to be utilized on a temporary basis
for pass rating borrowers where a significant risk-modifying action is
anticipated in the near term.
-
Rating 8 - This rating includes “Substandard”
loans, in accordance with regulatory guidelines, for which the accrual of
interest may or may not be discontinued. By definition under regulatory
guidelines, a “Substandard” loan has defined weaknesses which make payment
default or principal exposure likely, but not yet certain. Such loans are apt
to be dependent upon collateral liquidation, a secondary source of repayment,
or an event outside of the normal course of business.
-
Rating 9 - This rating includes “Doubtful” loans
in accordance with regulatory guidelines. Such loans are placed on nonaccrual
status and may be dependent upon collateral having a value that is difficult
to determine or upon some near-term event which lacks
certainty.
-
Rating 10 - This rating includes “Loss” loans in
accordance with regulatory guidelines. Such loans are to be charged-off or
charged-down when payment is acknowledged to be uncertain or when the timing
or value of payments cannot be determined. “Loss” is not intended to imply
that the loan or some portion of it will never be paid, nor does it in any way
imply that there has been a forgiveness of debt.
The
Company considers loans assigned a risk rating 8 through 10 to be classified
loans. The weighted average risk ratings declined from December 31, 2011, to
December 31, 2012. Overall classified loan balances have decreased, however,
both in total and as a percentage of the total loan portfolio. The following
table presents weighted average risk ratings of the loan portfolio and
classified loans by category:
|
(Dollars in thousands)
|
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
Weighted average
|
|
Classified
|
|
Weighted average
|
|
Classified
|
|
|
|
risk rating
|
|
loans
|
|
risk rating
|
|
loans
|
|
Commercial
|
|
|
5.82
|
|
$
|
15,281
|
|
|
5.84
|
|
$
|
22,401
|
|
Real estate construction
|
|
|
6.30
|
|
|
4,148
|
|
|
6.99
|
|
|
13,159
|
|
Real estate
mortgage
|
|
|
6.44
|
|
|
17,843
|
|
|
6.50
|
|
|
24,004
|
|
Commercial real estate
|
|
|
5.58
|
|
|
28,012
|
|
|
5.67
|
|
|
35,255
|
|
Installment and other
consumer
1
|
|
|
7.93
|
|
|
229
|
|
|
7.87
|
|
|
358
|
|
Total
|
|
|
|
|
$
|
65,513
|
|
|
|
|
$
|
95,177
|
|
|
|
Total loans risk rated
|
|
$
|
1,132,847
|
|
|
|
|
$
|
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.
|
75
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
Important
credit quality metrics for the homogenous pool basis include nonaccrual and past
due status. Total loans evaluated on a homogeneous pool basis were $362.1
million and $397.6 million at December 31, 2012, and 2011, respectively. The
following table presents loans by category that the credit risk is evaluated on
a homogenous pool basis. The real estate mortgage category includes home equity
lines of credit and home equity loans and certain small business loans.
|
(Dollars in thousands)
|
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
Current
|
|
Nonaccrual
|
|
30 - 89 days
|
|
Current
|
|
Nonaccrual
|
|
30 - 89 days
|
|
|
|
status
|
|
status
|
|
past due
|
|
status
|
|
status
|
|
past due
|
|
Commercial
|
|
$
|
40,170
|
|
$
|
1
|
|
$
|
173
|
|
$
|
46,774
|
|
$
|
11
|
|
$
|
112
|
|
Real estate construction
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
-
|
|
Real estate
mortgage
|
|
|
230,178
|
|
|
12
|
|
|
332
|
|
|
254,107
|
|
|
13
|
|
|
1,480
|
|
Commercial real estate
|
|
|
79,138
|
|
|
1
|
|
|
-
|
|
|
81,601
|
|
|
1
|
|
|
283
|
|
Installment and other
consumer
|
|
|
12,069
|
|
|
1
|
|
|
6
|
|
|
13,146
|
|
|
-
|
|
|
56
|
|
Total
|
|
$
|
361,555
|
|
$
|
19
|
|
$
|
511
|
|
$
|
395,628
|
|
$
|
29
|
|
$
|
1,931
|
The allowance for credit losses is a
reserve established through a provision for credit losses charged to expense,
which represents management’s best estimate as of the balance sheet date, of
probable losses that have been incurred within the existing loan portfolio. The
allowance for credit losses is based on historical loss experience by type of
credit and internal risk rating, specific homogeneous risk pools and specific
loss allocations, with adjustments for current events and conditions. The
Company’s process for determining the appropriate amount of the allowance for
credit losses is designed to account for credit deterioration as it occurs. The
provision for credit losses is reflective of loan quality trends, and considers
trends related to nonaccrual loans, past due loans, potential problem loans,
criticized loans and net charge-offs or recoveries, among other factors. The
provision for credit losses also reflects the totality of actions taken on all
loans for a particular period.
The allowance for credit losses
reflects management’s continuing evaluation of industry concentrations, specific
credit risks, loan loss experience, current loan portfolio quality, present
economic, political and regulatory conditions and unidentified losses inherent
in the current loan portfolio. Portions of the allowance may be allocated for
specific loans; however, the entire allowance is available for any loan that, in
management’s judgment, should be charged off. While management utilizes its best
judgment and information available, the ultimate adequacy of the allowance is
dependent upon a variety of factors beyond the Company’s control, including,
among other things, the economy, changes in interest rates and the view of the
regulatory authorities toward loan classifications.
The Company’s allowance for loan
losses consists of three key elements: specific reserve allowances, formula
allowance, and an unallocated allowance that represents an amount to capture
risk associated with qualitative factors and uncertainty that is inherent in
estimates used to determine the allowance.
Specific reserve allowances may be
established when management can estimate the amount of an impairment of a loan,
typically on a non real estate collateralized loan or to address the unique
risks associated with a group of loans or particular type of credit exposure.
The Company does not establish specific reserve allowances on collateral
dependent impaired loans. Impairment on these loans is charged off to the
allowance for credit losses when impairment is established.
The formula allowance is calculated
by applying loss factors to individual loans based on the assignment of risk
ratings, or through the assignment of loss factors to homogenous pools of loans.
Changes in risk ratings of both performing and nonperforming loans affect the
amount of the formula allowance. Loss factors are based on our historical loss
experience and such other data as management believes to be pertinent, and may
be adjusted for significant factors that, in management’s judgment, affect the
collectability of the portfolio as of the evaluation date. At December 31, 2012,
and 2011, the allowance for loan losses was $29.4 million and $35.2 million,
respectively, while the reserve for unfunded commitments was $.9 and $.8
million, respectively, at December 31, 2012, and 2011.
The unallocated loan loss allowance
represents an amount for imprecision or uncertainty that is inherent in
estimates used to determine the allowance. In determining whether to carry an
unallocated allowance and, if so, the amount of the allowance, management
considers a variety of qualitative factors, including regional economic and
business conditions that impact important categories of our portfolio, loan
growth rates, the depth and skill of lending staff, the interest rate
environment, and the results of bank regulatory examinations and findings of our
internal credit examiners. Currently, we have an unallocated allowance for loan
losses that is the result of our judgment about risks inherent in the loan
portfolio due to economic uncertainties, as well as our evaluation of historical
loss experience relative to current trends, and other subjective
factors.
76
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
The following is an analysis of the
changes in the allowance for credit losses:
|
(Dollars in thousands)
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Balance, beginning of
period
|
|
$
|
35,983
|
|
|
$
|
41,067
|
|
|
$
|
39,418
|
|
|
Provision (benefit) for credit
losses
|
|
|
(983
|
)
|
|
|
8,133
|
|
|
|
18,652
|
|
|
Losses charged to the
allowance
|
|
|
(7,845
|
)
|
|
|
(15,410
|
)
|
|
|
(19,476
|
)
|
|
Recoveries credited to the
allowance
|
|
|
3,162
|
|
|
|
2,193
|
|
|
|
2,473
|
|
|
Balance, end of
period
|
|
$
|
30,317
|
|
|
$
|
35,983
|
|
|
$
|
41,067
|
|
|
|
|
Components of allowance
for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
29,448
|
|
|
$
|
35,212
|
|
|
$
|
40,217
|
|
|
Reserve for unfunded
commitments
|
|
|
869
|
|
|
|
771
|
|
|
|
850
|
|
|
Total allowance for credit losses
|
|
$
|
30,317
|
|
|
$
|
35,983
|
|
|
$
|
41,067
|
|
The
following table presents summary account activity of the allowance for credit
losses by loan category as of December 31, 2012, and 2011:
|
(Dollars in thousands)
|
|
December 31,
2012
|
|
|
|
|
|
|
|
Real estate
|
|
Real estate
|
|
Commercial
|
|
Installment and
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
construction
|
|
mortgage
|
|
real
estate
|
|
other
consumer
|
|
Unallocated
|
|
Total
|
|
Balance, beginning of period
|
|
$
|
7,746
|
|
|
$
|
2,490
|
|
|
$
|
8,461
|
|
|
$
|
11,833
|
|
|
$
|
1,067
|
|
|
$
|
4,386
|
|
|
$
|
35,983
|
|
|
Provision (benefit) for credit losses
|
|
|
(895
|
)
|
|
|
(605
|
)
|
|
|
1,642
|
|
|
|
(875
|
)
|
|
|
775
|
|
|
|
(1,025
|
)
|
|
|
(983
|
)
|
|
Losses charged to the allowance
|
|
|
(2,266
|
)
|
|
|
(596
|
)
|
|
|
(2,731
|
)
|
|
|
(939
|
)
|
|
|
(1,313
|
)
|
|
|
-
|
|
|
|
(7,845
|
)
|
|
Recoveries credited to the allowance
|
|
|
1,144
|
|
|
|
134
|
|
|
|
422
|
|
|
|
1,201
|
|
|
|
261
|
|
|
|
-
|
|
|
|
3,162
|
|
|
Balance, end of period
|
|
$
|
5,729
|
|
|
$
|
1,423
|
|
|
$
|
7,794
|
|
|
$
|
11,220
|
|
|
$
|
790
|
|
|
$
|
3,361
|
|
|
$
|
30,317
|
|
|
|
|
Loans valued for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
4,794
|
|
|
$
|
1,336
|
|
|
$
|
14,377
|
|
|
$
|
21,869
|
|
|
$
|
81
|
|
|
$
|
-
|
|
|
$
|
42,457
|
|
|
Collectively
|
|
|
254,539
|
|
|
|
31,647
|
|
|
|
274,099
|
|
|
|
879,948
|
|
|
|
12,239
|
|
|
|
-
|
|
|
|
1,452,472
|
|
|
Total
|
|
$
|
259,333
|
|
|
$
|
32,983
|
|
|
$
|
288,476
|
|
|
$
|
901,817
|
|
|
$
|
12,320
|
|
|
$
|
-
|
|
|
$
|
1,494,929
|
|
|
|
|
(Dollars in thousands)
|
|
December 31,
2011
|
|
|
|
|
|
|
|
Real estate
|
|
Real estate
|
|
Commercial
|
|
Installment and
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
construction
|
|
mortgage
|
|
real
estate
|
|
other
consumer
|
|
Unallocated
|
|
Total
|
|
Balance, beginning of period
|
|
$
|
8,541
|
|
|
$
|
4,474
|
|
|
$
|
8,156
|
|
|
$
|
12,462
|
|
|
$
|
1,273
|
|
|
$
|
6,161
|
|
|
$
|
41,067
|
|
|
Provision for credit losses
|
|
|
1,262
|
|
|
|
(174
|
)
|
|
|
5,853
|
|
|
|
1,849
|
|
|
|
1,118
|
|
|
|
(1,775
|
)
|
|
|
8,133
|
|
|
Losses charged to the allowance
|
|
|
(3,393
|
)
|
|
|
(2,088
|
)
|
|
|
(5,771
|
)
|
|
|
(2,526
|
)
|
|
|
(1,632
|
)
|
|
|
-
|
|
|
|
(15,410
|
)
|
|
Recoveries credited to the allowance
|
|
|
1,336
|
|
|
|
278
|
|
|
|
223
|
|
|
|
48
|
|
|
|
308
|
|
|
|
-
|
|
|
|
2,193
|
|
|
Balance, end of period
|
|
$
|
7,746
|
|
|
$
|
2,490
|
|
|
$
|
8,461
|
|
|
$
|
11,833
|
|
|
$
|
1,067
|
|
|
$
|
4,386
|
|
|
$
|
35,983
|
|
|
|
|
Loans valued for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
7,974
|
|
|
$
|
5,864
|
|
|
$
|
18,728
|
|
|
$
|
23,674
|
|
|
$
|
180
|
|
|
$
|
-
|
|
|
$
|
56,420
|
|
|
Collectively
|
|
|
291,792
|
|
|
|
24,298
|
|
|
|
306,266
|
|
|
|
809,093
|
|
|
|
13,432
|
|
|
|
-
|
|
|
|
1,444,881
|
|
|
Total
|
|
$
|
299,766
|
|
|
$
|
30,162
|
|
|
$
|
324,994
|
|
|
$
|
832,767
|
|
|
$
|
13,612
|
|
|
$
|
-
|
|
|
$
|
1,501,301
|
|
77
4. PREMISES AND EQUIPMENT
Premises
and equipment consists of the following:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
Land
|
|
$
|
4,273
|
|
|
$
|
4,273
|
|
|
Buildings and improvements
|
|
|
29,974
|
|
|
|
29,937
|
|
|
Furniture and
equipment
|
|
|
26,396
|
|
|
|
28,663
|
|
|
Construction in progress
|
|
|
99
|
|
|
|
272
|
|
|
|
|
|
60,742
|
|
|
|
63,145
|
|
|
Accumulated depreciation
|
|
|
(38,794
|
)
|
|
|
(38,771
|
)
|
|
Total
|
|
$
|
21,948
|
|
|
$
|
24,374
|
|
Depreciation included in occupancy
and equipment expense amounted to $3.1 million, $3.4 million, and $3.8 million
for the years ended December 31, 2012, 2011, and 2010, respectively.
Depreciation for all premises and equipment is calculated using the
straight-line method. The Company periodically reviews the recorded value of its
long-lived assets, specifically premises and equipment, to determine whether
impairment exists. In 2011, the Company recorded impairment of $.1 million in
conjunction with a Bank branch that was closed and $.5 million of leasehold
improvement charge-offs associated with Bank branch closures. No material
impairments associated with premises and equipment were recorded during 2012 or
2010.
5. OTHER REAL ESTATE OWNED, NET
The following table summarizes
Bancorp’s OREO for the years ended December 31, 2012, and 2011:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
Balance, beginning
period
|
|
$
|
30,823
|
|
|
$
|
39,459
|
|
|
Additions to OREO
|
|
|
4,860
|
|
|
|
21,662
|
|
|
Disposition of
OREO
|
|
|
(16,564
|
)
|
|
|
(25,466
|
)
|
|
Valuation adjustments in the
period
|
|
|
(3,007
|
)
|
|
|
(4,832
|
)
|
|
Total OREO
|
|
$
|
16,112
|
|
|
$
|
30,823
|
|
The following table summarizes
Bancorp’s OREO valuation allowance for the years ended December 31, 2012, 2011,
and 2010:
|
(Dollars in thousands)
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Balance, beginning
period
|
|
$
|
8,151
|
|
|
$
|
7,584
|
|
|
$
|
9,489
|
|
|
Valuation adjustments in the
period
|
|
|
3,007
|
|
|
|
4,832
|
|
|
|
6,649
|
|
|
Deductions from the
valuation allowance due to disposition
|
|
|
(3,210
|
)
|
|
|
(4,265
|
)
|
|
|
(8,554
|
)
|
|
Total OREO valuation allowance
|
|
$
|
7,948
|
|
|
$
|
8,151
|
|
|
$
|
7,584
|
|
6
.
OTHER ASSETS
The
following table summarizes Bancorp’s other assets for the years ended December
31, 2012, and 2011:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
Deferred tax assets,
net
|
|
$
|
15,227
|
|
$
|
22,964
|
|
Accrued interest receivable
|
|
|
8,540
|
|
|
9,364
|
|
Investment in affordable
housing tax credits
|
|
|
2,600
|
|
|
3,251
|
|
Income taxes receivable
|
|
|
1,485
|
|
|
863
|
|
Other
|
|
|
7,975
|
|
|
8,431
|
|
Total other assets
|
|
$
|
35,827
|
|
$
|
44,873
|
Bancorp has invested in two limited
partnerships that operate qualified affordable housing properties. Tax credits
and tax deductions from operating losses are passed through the partnerships to
Bancorp. The Company accounts for these investments using the equity method.
7. BALANCES WITH THE FEDERAL RESERVE
BANK
The Bank is required to maintain
cash reserves or deposits with the Federal Reserve Bank equal to a percentage of
reservable deposits. The average required cash reserve for the Bank was $6.8
million and $6.5 million during the years ended December 31, 2012, and 2011,
respectively.
78
8. BORROWINGS
The
following table summarizes Bancorp’s borrowings as of December 31, 2012, and
2011:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
50,000
|
|
$
|
-
|
|
Long-term borrowings:
|
|
|
|
|
|
|
|
FHLB
non-putable advances
|
|
|
77,900
|
|
|
120,000
|
|
Total
long-term borrowings
|
|
|
77,900
|
|
|
120,000
|
|
Total borrowings
|
|
$
|
127,900
|
|
$
|
120,000
|
At December 31, 2012, Bancorp’s
long-term borrowings consisted of seven fixed rate, fixed maturity notes with
rates ranging from 1.03% to 1.74%. Principal payments due at the scheduled
maturities of Bancorp’s long-term borrowings at December 31, 2012, were $30.0
million in 2014, $29.3 million in 2015, $10.7 million in 2016, and $7.9 million
in 2019.
Long-term borrowings at December 31,
2011, consisted of notes with fixed maturities and putable advances with the
FHLB totaling $120.0 million at interest rates ranging from 0.81% to 1.43%.
Total long-term borrowings with fixed maturities were $120.0 million at December
31, 2011.
During 2011, the Company prepaid
$168.6 million in long-term FHLB borrowings, offset in part by $120.0 million in
new long-term FHLB borrowings in the same period. As a result of the long-term
borrowing prepayments, the Company incurred a prepayment charge of $7.1 million
for the year ended December 31, 2011.
FHLB advances are collateralized, as
provided for in an “Advances, Security and Deposit Agreement” with the FHLB, by
investment securities and qualifying loans. At December 31, 2012, the Company
had additional borrowing capacity available at the FHLB of $383.5 million based
on pledged collateral. Bancorp had no outstanding Federal Funds purchased from
correspondent banks, borrowings from the discount window, or reverse repurchase
agreements at December 31, 2012, and 2011.
79
9. JUNIOR SUBORDINATED DEBENTURES
At December
31, 2012, six wholly-owned subsidiary grantor trusts established by Bancorp had
issued and sold $51.0 million of trust preferred securities. Trust preferred
securities accrue and pay distributions periodically at specified annual rates
as provided in each indenture. The trusts used all of the net proceeds from each
sale of trust preferred securities to purchase a like amount of junior
subordinated debentures of the Company. The junior subordinated debentures are
the sole assets of the trusts. The Company’s obligations under the junior
subordinated debentures and related documents, taken together, constitute a full
and unconditional guarantee by the Company of the obligations of the trusts. The
trust preferred securities are mandatorily redeemable upon the maturity of the
junior subordinated debentures and may be subject to earlier redemption by the
Company as provided in the indentures. The Company has the right to redeem the
junior subordinated debentures in whole (but not in part) on or after specific
dates, at a redemption price specified in the indentures plus any accrued but
unpaid interest to the redemption date. Bancorp has no deferred interest on its
outstanding debentures.
The following table is a summary of outstanding trust preferred
securities at December 31, 2012:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
security
|
|
|
|
|
|
Rate at
|
|
|
|
Next possible
|
|
Issuance Trust
|
|
Issuance date
|
|
amount
|
|
Rate type
1
|
|
Initial rate
|
|
12/31/12
|
|
Maturity date
|
|
redemption date
|
|
West Coast Statutory Trust
III
|
|
September 2003
|
|
$
|
7,500
|
|
Variable
|
|
6.75%
|
|
3.26%
|
|
September 2033
|
|
Currently
redeemable
|
|
West Coast Statutory Trust IV
|
|
March 2004
|
|
$
|
6,000
|
|
Variable
|
|
5.88%
|
|
3.10%
|
|
March 2034
|
|
Currently redeemable
|
|
West Coast Statutory Trust
V
|
|
April 2006
|
|
$
|
15,000
|
|
Variable
|
|
6.79%
|
|
1.74%
|
|
June 2036
|
|
Currently
redeemable
|
|
West Coast Statutory Trust VI
|
|
December 2006
|
|
$
|
5,000
|
|
Variable
|
|
7.04%
|
|
1.99%
|
|
December 2036
|
|
Currently redeemable
|
|
West Coast Statutory Trust
VII
|
|
March 2007
|
|
$
|
12,500
|
|
Variable
|
|
6.90%
|
|
1.86%
|
|
June 2037
|
|
Currently
redeemable
|
|
West Coast Statutory Trust VIII
|
|
June 2007
|
|
$
|
5,000
|
|
Variable
|
|
6.74%
|
|
1.69%
|
|
June 2037
|
|
Currently redeemable
|
|
|
|
Total
|
|
$
|
51,000
|
|
|
|
Weighted rate
|
2.17%
|
|
|
|
|
|
1
|
The
variable rate preferred securities reprice
quarterly.
|
The weighted
average interest rate on the trust preferred securities was 2.17% at December
31, 2012. The interest rate on each security resets quarterly and is tied to the
London Interbank Offered Rate (“LIBOR”) rate. The junior subordinated debentures
issued by Bancorp to the grantor trust are reflected in our consolidated balance
sheet in the liabilities section at December 31, 2012, and 2011, as junior
subordinated debentures. Bancorp records interest expense on the corresponding
junior subordinated debentures in the consolidated statements of income. The
common capital securities issued by the trusts are recorded within other assets
in the consolidated balance sheets, and totaled $1.6 million at December 31,
2012, and 2011.
80
10. EMPLOYEE BENEFIT PLANS
Bancorp
employee benefits include a plan established under section 401(k) of the
Internal Revenue Code for certain qualified employees (the “401(k) plan”).
Employee contributions up to 100 percent of salaries under the Internal Revenue
Code guidelines can be made under the 401(k) plan, of which Bancorp may match 50
percent of the employees’ contributions up to a maximum of three percent of the
employees’ eligible compensation. Bancorp may also elect to make discretionary
contributions to the plan. In 2011 and 2010, Bancorp made qualified,
non-elective, discretionary contributions into employee 401(k) plans; no such
contributions were made in 2012. Bancorp’s 401(k) related discretionary
contributions expenses for 2012, 2011, and 2010 were zero, $.3 million, and $.1
million, respectively. Employees vest immediately in their own contributions and
earnings, and vest in Bancorp’s matching contributions over five years of
eligible service. Bancorp had 401(k) plan related matching expenses of $.6
million in 2012, while no such expenses were recorded in 2011 and 2010 related
to the Company’s 401(k) plan match.
Bancorp provides separate non-qualified deferred compensation plans for
directors and executive officers (collectively, “Deferred Compensation Plans”)
as supplemental benefit plans which permit directors and selected officers to
elect to defer receipt of all or any portion of their future salary, bonus or
directors’ fees, including with respect to officers, amounts they otherwise
might not be able to defer under the 401(k) plan due to specified Internal
Revenue Code restrictions on the maximum deferral that may be allowed under that
plan. Under the Deferred Compensation Plans, an amount equal to compensation
being deferred by participants is placed in a rabbi trust, the assets of which
is available to Bancorp’s creditors and invested consistent with the
participants’ direction among a variety of investment alternatives. A deferred
compensation liability of $1.9 million was included in other liabilities as of
December 31, 2012, up $.3 million or 16% from $1.6 million at December 31, 2011.
Bancorp has multiple supplemental executive retirement agreements with former
and current executives. The following table reconciles the accumulated liability
for the benefit obligation of these agreements:
|
(Dollars in thousands)
|
|
Year ended December 31,
|
|
|
|
2012
|
|
2011
|
|
Beginning
balance
|
|
$
|
3,364
|
|
|
$
|
2,618
|
|
|
Benefit expense
|
|
|
447
|
|
|
|
878
|
|
|
Benefit payments
|
|
|
(318
|
)
|
|
|
(132
|
)
|
|
Ending balance
|
|
$
|
3,493
|
|
|
$
|
3,364
|
|
Bancorp’s
obligations under supplemental executive retirement agreements are unfunded
plans and have no plan assets. The benefit obligation represents the vested net
present value of future payments to individuals under the agreements. Bancorp’s
benefit expense, as specified in the agreements for the entire year 2013, is
expected to be $.2 million. The benefits expected to be paid are presented in
the following table:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Benefits expected
to
|
|
Year
|
|
be paid
|
|
2013
|
|
$
|
1,956
|
|
2014
|
|
|
81
|
|
2015
|
|
|
82
|
|
2016
|
|
|
83
|
|
2017
|
|
|
84
|
|
2018 through 2022
|
|
|
432
|
81
11. COMMITMENTS AND CONTINGENT
LIABILITIES
The Company
leases land and office space under 46 leases, of which 45 are long-term
operating leases that expire between 2013 and 2024. At the end of most of the
respective lease terms, Bancorp has the option to renew the leases at fair
market value. At December 31, 2012, minimum future lease payments under these
leases and other operating leases were:
|
(Dollars in thousands)
|
|
Minimum
Future
|
|
Year
|
|
Lease Payments
|
|
|
|
2013
|
|
$
|
4,106
|
|
2014
|
|
|
3,812
|
|
2015
|
|
|
3,174
|
|
2016
|
|
|
2,615
|
|
2017
|
|
|
1,923
|
|
Thereafter
|
|
|
6,104
|
|
Total
|
|
$
|
21,734
|
Rental expense
for all operating leases was $4.4 million, $4.5 million, and $4.2 million for
the years ended December 31, 2012, 2011, and 2010, respectively.
Bancorp is periodically party to litigation arising in the ordinary
course of business. Based on information currently known to management, although
there are uncertainties inherent in litigation, we do not believe there is any
legal action to which Bancorp or any of its subsidiaries is a party that,
individually or in the aggregate, will have a materially adverse effect on
Bancorp’s financial condition and results of operations, cash flows, or
liquidity.
12. STOCKHOLDERS’ EQUITY AND REGULATORY
CAPITAL
Authorized capital stock of Bancorp at December 31, 2012, included
50,000,000 shares of Common Stock, no par value, and 10,000,000 shares of
Preferred Stock, no par value, of which 2,000,000 shares had been designated as
Mandatorily Convertible Cumulative Participating Preferred Stock, Series A
(“Series A Preferred Stock”) and 600,000 shares had been designated as
Mandatorily Convertible Cumulative Participating Preferred Stock, Series B
(“Series B Preferred Stock”).
Preferred Stock.
Following the receipt of shareholder approvals on January 20, 2010,
1,428,849 shares of Series A Preferred Stock issued in connection with Bancorp's
Private Capital Raise and outstanding at December 31, 2009, automatically
converted into an aggregate of 14,288,490 shares of Common Stock. As of December
31, 2012, and 2011, there were no shares of Series A Preferred Stock currently
outstanding.
Bancorp also issued an aggregate of 121,328 shares of Series B Preferred
Stock in the Private Capital Raise all of which remains outstanding. These
shares will automatically convert into an aggregate of 1,213,280 shares of
Common Stock upon transfer of the Series B Preferred Stock to third parties in a
widely dispersed offering.
The Series B Preferred Stock is not subject to the operation of a sinking
fund. The Series B Preferred Stock is not redeemable by the Company and is
perpetual with no maturity. The holders of Series B Preferred Stock have no
general voting rights. Bancorp had accrued dividends on Series B Preferred Stock
of $.1 million and $0, respectively, at December 31, 2012, and 2011, and no
dividends in arrears for those same years.
Warrants to Purchase Series B Preferred Stock.
In October 2009, as part of a Private
Capital Raise, Bancorp issued Class C Warrants to purchase an aggregate of
240,000 shares of Series B Preferred Stock at an exercise price of $100.00 per
share or $24 million in aggregate. The Warrants were immediately exercisable and
will expire on October 23, 2016. Shares of Series B Preferred Stock issuable
upon exercise of the Warrants will automatically convert into an aggregate of
2.4 million shares of Common Stock upon transfer of the Series B Preferred Stock
to third parties in a widely dispersed offering.
The Company allocated the proceeds of $21.1 million from the issuance of
the Series B Preferred Stock and Warrants between the two based on their
relative fair values. The fair value allocated to the warrants was $11.1
million.
The Company maintains a stock repurchase plan. Under the Company’s stock
repurchase plan, the Company can purchase up to 980,000 shares of the Company’s
Common Stock. The Company did not repurchase any shares under this plan in 2012
nor does it anticipate repurchasing any shares in the foreseeable future. Total
shares available for repurchase under this plan are 210,400 at December 31,
2012.
82
12. STOCKHOLDERS’ EQUITY AND REGULATORY
CAPITAL
Regulatory Capital.
The
Federal Reserve and Federal Deposit Insurance Corporation (“FDIC”) have
established minimum requirements for capital adequacy for bank holding companies
and nonmember banks. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Bancorp and the Bank must meet specific
capital guidelines that involve quantitative measures of assets, liabilities and
certain off balance sheet items. The Federal Reserve and FDIC risk based capital
guidelines require banks and bank holding companies to have a ratio of Tier 1
capital to total risk weighted assets of at least 4%, and a ratio of total
capital to total risk weighted assets of 8% or greater. In addition, the
leverage ratio of Tier 1 capital to total average assets less intangibles is
required to be at least 4%. Bancorp and its bank subsidiary’s capital
components, classification, risk weightings and other factors are also subject
to qualitative judgments by regulators. Failure to meet minimum capital
requirements can initiate certain action by regulators that, if undertaken,
could have a material effect on Bancorp’s financial statements.
Bancorp’s total risk-based capital ratio improved to 21.83% at December
31, 2012, up from 20.62% at December 31, 2011, while Bancorp's Tier 1 risk-based
capital ratio increased to 20.66% at December 31, 2012, from 19.36% at December
31, 2011. Bancorp’s capital ratios improved over year end 2011 principally as a
result of the consistent improvement in the core operating performance of the
Company over the past two years and a reduction in the Company’s risk weighted
assets over the past 12 months also contributed to improved capital ratios at
Bancorp.
The following table presents the capital measures of Bancorp and the Bank
as of December 31, 2012, and 2011:
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
|
|
Required For
|
|
required for
|
|
|
|
|
|
|
|
Required For
|
|
required for
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
Minimum
|
|
|
|
|
|
|
|
Minimum
|
|
Minimum
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
Capital
|
|
Capital
|
|
|
|
|
|
|
|
Capital
|
|
Capital
|
|
|
|
Amount
|
|
Ratio
|
|
Adequacy
|
|
Adequacy
|
|
Amount
|
|
Ratio
|
|
Adequacy
|
|
Adequacy
|
|
Tier 1 risk-based
capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
Bancorp
|
|
$
|
380,712
|
|
20.66
|
%
|
|
$
|
73,721
|
|
4%
|
|
$
|
355,498
|
|
19.36
|
%
|
|
$
|
73,461
|
|
4%
|
|
West Coast Bank
|
|
|
367,320
|
|
19.95
|
%
|
|
|
73,654
|
|
4%
|
|
|
342,213
|
|
18.66
|
%
|
|
|
73,367
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based
capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
Bancorp
|
|
$
|
402,261
|
|
21.83
|
%
|
|
$
|
147,441
|
|
8%
|
|
$
|
378,616
|
|
20.62
|
%
|
|
$
|
146,923
|
|
8%
|
|
West Coast Bank
|
|
|
390,427
|
|
21.20
|
%
|
|
|
147,308
|
|
8%
|
|
|
365,301
|
|
19.92
|
%
|
|
|
146,733
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
Bancorp
|
|
$
|
380,712
|
|
15.60
|
%
|
|
$
|
97,627
|
|
4%
|
|
$
|
355,498
|
|
14.61
|
%
|
|
$
|
97,301
|
|
4%
|
|
West Coast Bank
|
|
|
367,320
|
|
15.07
|
%
|
|
|
97,489
|
|
4%
|
|
|
342,213
|
|
14.09
|
%
|
|
|
97,119
|
|
4%
|
83
13. STOCK PLANS
On April 24,
2012, shareholders approved Bancorp’s 2012 Omnibus Incentive Plan (the “2012
Incentive Plan”). Bancorp's 2002 Stock Incentive Plan (the “2002 Plan”) was
terminated on March 8, 2012, and no additional awards will be granted under the
2002 Plan. The 2012 Incentive Plan authorizes the issuance of up to 400,000
shares to participants in connection with grants of stock options, restricted
stock, restricted stock units, stock appreciation rights, and other stock-based
awards. The 2012 Incentive Plan has 372,166 shares available for grant at
December 31, 2012. The number of shares that may be issued under the 2012
Incentive Plan is subject to adjustment in certain circumstances.
It is Bancorp’s policy to issue new shares for stock option exercises and
restricted stock awards. Bancorp expenses stock options and restricted stock on
a straight line basis over the applicable vesting term. Restricted stock granted
generally vests over a two to four year vesting period; however, certain grants
have been made that vested immediately or over a one year period, including
grants to directors.
All outstanding stock options have an exercise price that was equal to
the closing market value of Bancorp’s stock on the date the options were
granted. Options granted generally vest over a two to four year vesting period;
however, certain grants have been made that vested immediately, including grants
to directors. Stock options have a 10 year maximum term. The following table
presents information on stock options outstanding for the periods shown:
|
|
|
|
|
|
2012
|
|
|
|
|
2011
|
|
|
|
|
2010
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
2012 Common
|
|
Avg. Ex.
|
|
2011 Common
|
|
Avg. Ex.
|
|
2010 Common
|
|
Avg. Ex.
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Balance, beginning of
year
|
|
257,080
|
|
|
$
|
70.12
|
|
306,527
|
|
|
$
|
66.89
|
|
349,350
|
|
|
$
|
65.38
|
|
Granted
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
190
|
|
|
|
13.15
|
|
Exercised
|
|
(13,085
|
)
|
|
|
11.55
|
|
(6,917
|
)
|
|
|
11.55
|
|
(305
|
)
|
|
|
11.55
|
|
Forfeited/expired
|
|
(45,044
|
)
|
|
|
76.11
|
|
(42,530
|
)
|
|
|
56.33
|
|
(42,709
|
)
|
|
|
54.78
|
|
Balance, end of
year
|
|
198,951
|
|
|
$
|
72.62
|
|
257,080
|
|
|
$
|
70.12
|
|
306,527
|
|
|
$
|
66.89
|
|
Exercisable, end of year
|
|
198,926
|
|
|
|
|
|
250,462
|
|
|
|
|
|
258,796
|
|
|
|
|
The average
fair value of stock options granted is estimated on the date of grant using the
Black-Scholes option-pricing model. There were no stock options granted in 2012
and 2011. The following table presents the assumptions used in the fair value
calculation for 2010:
|
|
|
December 31,
|
|
|
|
2010
|
|
Risk Free interest
rates
|
|
|
1.43
|
%
|
|
Expected dividend
|
|
|
0.00
|
%
|
|
Expected lives, in
years
|
|
|
4
|
|
|
Expected volatility
|
|
|
38
|
%
|
|
Fair value of options
granted
|
|
$
|
4.16
|
|
As of December
31, 2012, outstanding stock options consist of the following:
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Remaining Years
to
|
|
Weighted Avg.
|
|
|
|
Weighted Avg.
|
|
Exercise Price Range
|
|
Outstanding
|
|
Maturity
|
|
Exercise Price
|
|
Options Exercisable
|
|
Exercise Price
|
|
$
|
11.55
|
-
|
$
|
50.10
|
|
57,853
|
|
|
6.32
|
|
$
|
11.69
|
|
57,828
|
|
$
|
11.69
|
|
|
50.10
|
-
|
|
63.75
|
|
29,659
|
|
|
5.30
|
|
|
63.72
|
|
29,659
|
|
|
63.72
|
|
|
63.75
|
-
|
|
103.20
|
|
59,694
|
|
|
1.36
|
|
|
92.76
|
|
59,694
|
|
|
92.76
|
|
|
103.20
|
-
|
|
170.65
|
|
51,745
|
|
|
2.31
|
|
|
122.59
|
|
51,745
|
|
|
122.59
|
|
Total
|
|
|
|
|
198,951
|
|
|
3.64
|
|
$
|
72.62
|
|
198,926
|
|
$
|
72.62
|
84
13. STOCK PLANS
The following
table presents information on stock options outstanding for the periods shown,
less estimated forfeitures:
|
(Dollars in thousands, except share and per
share data)
|
|
Year ended December
31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Intrinsic value of options
exercised in the period
|
|
$
|
102
|
|
$
|
34
|
|
$
|
-
|
|
|
|
Stock options fully vested and expected to
vest:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
198,951
|
|
|
250,734
|
|
|
298,918
|
|
Weighted average exercise price
|
|
$
|
72.62
|
|
$
|
70.12
|
|
$
|
66.90
|
|
Aggregate intrinsic
value
|
|
$
|
611
|
|
$
|
282
|
|
$
|
190
|
|
Weighted average contractual term of options
|
|
|
3.6 years
|
|
|
4.1 years
|
|
|
4.7 years
|
|
|
|
Stock options vested and
currently exercisable
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
198,926
|
|
|
250,462
|
|
|
258,796
|
|
Weighted average
exercise price
|
|
$
|
72.62
|
|
$
|
70.32
|
|
$
|
73.90
|
|
Aggregate intrinsic value
|
|
$
|
611
|
|
$
|
289
|
|
$
|
123
|
|
Weighted average
contractual term of options
|
|
|
3.6 years
|
|
|
4.0 years
|
|
|
4.1 years
|
|
|
|
Unearned compensation
related to stock options
|
|
$
|
-
|
|
$
|
15
|
|
$
|
110
|
Restricted
stock grants are made at the discretion of the Board of Directors, except with
regard to grants to certain Company officers, which are made at the discretion
of the Board’s Compensation & Personnel Committee. Compensation expense for
restricted stock is based on the market price of the Company stock at the date
of the grant and amortized on a straight-line basis over the vesting period
which is currently one, three or four years for all grants. Recipients of
restricted stock do not pay any cash consideration to the Company for the
shares, have the right to vote all shares subject to such grant and receive all
dividends with respect to such shares, whether or not the shares have
vested.
Restricted stock consists of the following for the years ended December
31, 2012, 2011, and 2010:
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Avg. Grant
|
|
|
|
|
Avg. Grant
|
|
|
|
|
Avg. Grant
|
|
|
|
2012 Restricted
|
|
Date Fair
|
|
2011 Restricted
|
|
Date Fair
|
|
2010 Restricted
|
|
Date Fair
|
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Balance, beginning of
year
|
|
264,631
|
|
|
$
|
16.98
|
|
327,396
|
|
|
$
|
18.99
|
|
27,336
|
|
|
$
|
85.02
|
|
Granted
|
|
29,673
|
|
|
|
19.05
|
|
63,659
|
|
|
|
16.77
|
|
322,561
|
|
|
|
16.22
|
|
Vested
|
|
(95,446
|
)
|
|
|
18.16
|
|
(101,273
|
)
|
|
|
22.07
|
|
(13,342
|
)
|
|
|
84.18
|
|
Forfeited
|
|
(21,199
|
)
|
|
|
15.90
|
|
(25,151
|
)
|
|
|
22.11
|
|
(9,159
|
)
|
|
|
23.29
|
|
Balance, end of
year
|
|
177,659
|
|
|
$
|
16.81
|
|
264,631
|
|
|
$
|
16.98
|
|
327,396
|
|
|
$
|
18.99
|
|
|
|
Weighted avg.
remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recognition period
|
|
1.58 years
|
|
|
|
|
|
2.33 years
|
|
|
|
|
|
3.03 years
|
|
|
|
|
The following
table presents stock-based compensation expense for employees and directors
related to restricted stock and stock options for the periods shown:
|
|
|
Twelve months ended
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
Restricted stock
expense
|
|
$
|
1,530
|
|
$
|
1,819
|
|
$
|
1,884
|
|
Stock option expense
|
|
|
15
|
|
|
80
|
|
|
205
|
|
Total stock-based
compensation expense
|
|
$
|
1,545
|
|
$
|
1,899
|
|
$
|
2,089
|
|
|
|
Tax benefit recognized on
share-based expense
|
|
$
|
541
|
|
$
|
722
|
|
$
|
793
|
The balance of
unearned compensation related to unvested restricted stock granted as of
December 31, 2012, and 2011, was $2.0 million and $3.3 million, respectively.
The unearned compensation balance at December 31, 2012, is expected to be
recognized over a weighted average period of 1.6 years, or immediately upon a
change in control event. The Company received cash in the amount of $151,132 and
$79,891 from stock option exercises for the twelve months ended December 31,
2012, and 2011, respectively. The Company recorded $11,000 of tax expense and
$69,350 of tax benefits from disqualifying dispositions involving incentive
stock options, the exercise of non-qualified stock options, and the vesting and
release of restricted stock for the twelve months ended December 31, 2012, and
2011.
85
14. 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 the same manner as basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if certain
shares issuable upon exercise of options and warrants, conversion of preferred
stock, and unvested restricted stock were included, unless those additional
shares would have been anti-dilutive. For the diluted earnings per share
computation, the treasury stock method is applied and compared to the two-class
method and whichever method results in a more dilutive impact is utilized to
calculate diluted earnings per share. The two-class method was utilized to
calculate diluted earnings per share for the year ended December 31, 2012.
The following table reconciles the numerator and denominator of the basic
and diluted earnings per share computations for the year ended December 31,
2012, 2011, and 2010:
|
(Dollars and shares in thousands, except per
share amounts)
|
|
Year ended December 31,
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Net income
|
|
$
|
23,506
|
|
$
|
33,777
|
|
$
|
3,225
|
|
Less: Net income allocated to participating
securities-basic:
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
1,391
|
|
|
1,998
|
|
|
367
|
|
Unvested restricted stock
|
|
|
234
|
|
|
477
|
|
|
37
|
|
Net income available to
common stock holders-basic
|
|
|
21,881
|
|
|
31,302
|
|
|
2,821
|
|
Add: Net income allocated per two-class
method-diluted:
|
|
|
|
|
|
|
|
|
|
|
Stock options and
Class C warrants
|
|
|
83
|
|
|
108
|
|
|
12
|
|
Net income available to common
stockholders-diluted
|
|
$
|
21,964
|
|
$
|
31,410
|
|
$
|
2,833
|
|
|
|
Weighted average common
shares outstanding-basic
|
|
|
19,086
|
|
|
19,007
|
|
|
17,460
|
|
Common stock equivalents from:
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
25
|
|
|
20
|
|
|
6
|
|
Class C
Warrants
|
|
|
1,175
|
|
|
913
|
|
|
593
|
|
Weighted average common
shares outstanding-diluted
|
|
|
20,286
|
|
|
19,940
|
|
|
18,059
|
|
|
|
Basic earnings per
share
|
|
$
|
1.15
|
|
$
|
1.65
|
|
$
|
0.16
|
|
Diluted earnings per share
|
|
$
|
1.08
|
|
$
|
1.58
|
|
$
|
0.16
|
|
|
|
Common stock equivalent
shares excluded due to anti-dilutive effect
|
|
|
159
|
|
|
199
|
|
|
441
|
86
15. INCOME TAXES
The components
of the provision (benefit) for income taxes for the last three years were:
|
(Dollars in thousands)
|
|
Year ended December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,737
|
|
$
|
1,349
|
|
|
$
|
6,230
|
|
|
State
|
|
|
100
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
5,837
|
|
|
1,449
|
|
|
|
6,330
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
5,396
|
|
|
(20,206
|
)
|
|
|
(2,483
|
)
|
|
State
|
|
|
1,014
|
|
|
(1,455
|
)
|
|
|
(57
|
)
|
|
|
|
|
6,410
|
|
|
(21,661
|
)
|
|
|
(2,540
|
)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
11,133
|
|
|
(18,857
|
)
|
|
|
3,747
|
|
|
State
|
|
|
1,114
|
|
|
(1,355
|
)
|
|
|
43
|
|
|
Total provision (benefit) for income
taxes
|
|
$
|
12,247
|
|
$
|
(20,212
|
)
|
|
$
|
3,790
|
|
The deferred
Federal and State tax expense includes a benefit from the full reversal of the
deferred tax asset valuation allowance of $23.5 million for the year ended
December 31, 2011.
The reconciliation between the Company’s effective tax rate on income and
the statutory rate is as follows:
|
(Dollars in thousands)
|
|
Year ended December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Expected federal income
tax (benefit) provision
1
|
|
$
|
12,514
|
|
|
$
|
4,612
|
|
|
$
|
2,385
|
|
|
State income tax, net of federal
income tax effect
|
|
|
999
|
|
|
|
422
|
|
|
|
66
|
|
|
Interest on obligations of
state and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exempt from federal
tax
|
|
|
(785
|
)
|
|
|
(755
|
)
|
|
|
(901
|
)
|
|
Federal low income housing tax
credits
|
|
|
(477
|
)
|
|
|
(535
|
)
|
|
|
(427
|
)
|
|
Bank owned life
insurance
|
|
|
(321
|
)
|
|
|
(305
|
)
|
|
|
(302
|
)
|
|
Change in deferred tax asset
valuation allowance
|
|
|
-
|
|
|
|
(23,464
|
)
|
|
|
2,465
|
|
|
Other, net
|
|
|
317
|
|
|
|
(187
|
)
|
|
|
504
|
|
|
Total (benefit) provision for income taxes
|
|
$
|
12,247
|
|
|
$
|
(20,212
|
)
|
|
$
|
3,790
|
|
|
1
|
Federal income tax provision applied at 35% in 2012 and 34% in 2011
and 2010.
|
87
15. INCOME TAXES
Net deferred
taxes are included in other assets on the Company’s balance sheet. The tax
effect of temporary differences that give rise to significant components of
deferred tax assets and deferred tax liabilities as of December 31, 2012, and
2011, are presented below:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
11,317
|
|
$
|
13,532
|
|
Reserve for unfunded
commitments
|
|
|
334
|
|
|
296
|
|
Deferred employee benefits
|
|
|
2,422
|
|
|
2,247
|
|
Stock option and
restricted stock
|
|
|
658
|
|
|
732
|
|
Valuation allowance on OREO
|
|
|
3,054
|
|
|
3,133
|
|
Capitalized OREO
expenses
|
|
|
1,230
|
|
|
1,050
|
|
Taxable interest on nonaccrual
loans
|
|
|
1,709
|
|
|
2,646
|
|
State net operating loss
carryforwards
|
|
|
1,856
|
|
|
3,093
|
|
State business energy and low income housing
tax credits
|
|
|
1,073
|
|
|
770
|
|
Federal low income housing
tax credits
|
|
|
-
|
|
|
1,776
|
|
Other
|
|
|
1,973
|
|
|
3,085
|
|
Total gross deferred tax
assets
|
|
|
25,626
|
|
|
32,360
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
589
|
|
|
957
|
|
Net unrealized gain on
investments available for sale
|
|
|
6,140
|
|
|
4,813
|
|
Loan origination costs
|
|
|
1,728
|
|
|
1,610
|
|
Federal Home Loan Bank
stock dividends
|
|
|
1,860
|
|
|
1,893
|
|
Other
|
|
|
82
|
|
|
123
|
|
Total gross
deferred tax liabilities
|
|
|
10,399
|
|
|
9,396
|
|
Net deferred tax assets
|
|
$
|
15,227
|
|
$
|
22,964
|
At December
31, 2012, the Company has state tax net operating loss carryforwards of $1.9
million and state tax credit carryforwards of $1.1 million. The following table
summarizes the expiration dates of state net operating loss and tax credit
carryforwards:
|
(Dollars in thousands)
|
|
|
|
|
|
|
Year of expiration
|
|
Type
|
|
Amount
|
|
2023-2026
|
|
State net operating
losses
|
|
$
|
1,856
|
|
2016-2019
|
|
State tax credits-business energy
|
|
|
724
|
|
2013-2016
|
|
State tax credits-low
income housing
|
|
|
350
|
Bancorp is
subject to U.S. federal income taxes and State of Oregon income taxes. The years
2009 through 2012 remain open to examination for federal income taxes and for
State examination. As of December 31, 2012, and 2011, Bancorp had no
unrecognized tax benefits or uncertain tax positions. Bancorp had no accrued
interest or penalties as of December 31, 2012.
16. TIME DEPOSITS
Included in time deposits are deposits in denominations of $100,000 or
greater, totaling $41.6 million and $54.5 million at December 31, 2012, and
2011, respectively. Interest expense relating to time deposits in denominations
of $100,000 or greater was $.4 million, $1.0 million, and $2.7 million for the
years ended December 31, 2012, 2011, and 2010, respectively. Maturity amounts on
Bancorp’s time deposits include $95.2 million in 2013, $23.4 million in 2014,
$5.3 million in 2015, $3.7 million in 2016, and $3.0 million in 2017. Included
in the maturity amounts are $1.6 million in variable rate time deposits that
reprice monthly with maturities in the first quarter of 2013.
88
17. FAIR VALUE MEASUREMENT AND FAIR
VALUES OF FINANCIAL INSTRUMENTS
Bancorp
measures or discloses certain financial assets and liabilities at fair value in
accordance with GAAP, which defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Bancorp has estimated fair value based on quoted market prices where
available. In cases where quoted market prices were not available, fair values
were based on the quoted market price of a financial instrument with similar
characteristics, the present value of expected future cash flows or other
valuation techniques that utilize assumptions which are subjective and
judgmental in nature.
Subjective factors include,
among other things, estimates of cash flows, the timing of cash flows, risk and
credit quality characteristics, interest rates and liquidity premiums or
discounts. Accordingly, the results may not be precise, and modifying the
assumptions may significantly affect the values derived. Further, fair values
may or may not be realized if a significant portion of the financial instruments
were sold in a bulk transaction or a forced liquidation. Therefore, any
aggregate unrealized gains or losses should not be interpreted as a forecast of
future earnings or cash flows. Furthermore, the fair values disclosed should not
be interpreted as the aggregate current value of Bancorp.
GAAP established a fair value hierarchy which prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. The
fair value hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). A financial instrument’s categorization within
the fair value hierarchy is based upon the lowest level of input that is
significant to the instrument’s fair value measurement. The three levels within
the fair value hierarchy are described as follows:
-
Level 1 - Quoted prices in
active markets for identical assets utilizing inputs that the Company has the
ability to access at the measurement date. An active market for the asset is a
market in which transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing
basis.
-
Level 2 - Other observable inputs
that reflect the assumptions market participants would use in pricing the
asset or liability developed based on market data obtained from sources
independent of the reporting entity including quoted prices for similar
assets, quoted prices for securities in inactive markets and inputs derived
principally from or corroborated by observable market data by correlation or
other means.
-
Level 3 - Significant unobservable
inputs that reflect the reporting entity’s own estimates about the assumptions
market participants would use in pricing the asset or liability developed
based on the best information available in the circumstances.
The estimated
fair values of financial instruments and respective level classifications at
December 31, 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
|
|
$
|
137,611
|
|
$
|
137,611
|
|
$
|
137,611
|
|
$
|
-
|
|
$
|
-
|
|
Investment
securities
|
|
|
772,109
|
|
|
772,109
|
|
|
1,968
|
|
|
761,003
|
|
|
9,138
|
|
Federal Home Loan Bank
stock
|
|
|
11,932
|
|
|
11,932
|
|
|
-
|
|
|
11,932
|
|
|
-
|
|
Net loans (net of
allowance for loan losses)
|
|
|
1,465,481
|
|
|
1,392,641
|
|
|
-
|
|
|
-
|
|
|
1,392,641
|
|
Bank owned life insurance
|
|
|
27,160
|
|
|
27,160
|
|
|
-
|
|
|
27,160
|
|
|
-
|
|
|
|
FINANCIAL
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,936,000
|
|
$
|
1,936,172
|
|
$
|
-
|
|
$
|
1,936,172
|
|
$
|
-
|
|
Short-term
borrowings
|
|
|
50,000
|
|
|
50,000
|
|
|
-
|
|
|
50,000
|
|
|
-
|
|
Long-term borrowings
|
|
|
77,900
|
|
|
78,758
|
|
|
-
|
|
|
78,758
|
|
|
-
|
|
|
|
Junior subordinated
debentures-variable
|
|
|
51,000
|
|
|
27,331
|
|
|
-
|
|
|
27,331
|
|
|
-
|
89
17. FAIR VALUE MEASUREMENT AND FAIR
VALUES OF FINANCIAL INSTRUMENTS
The fair
values of financial instruments at December 31, 2011, 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
|
|
$
|
92,227
|
|
$
|
92,227
|
|
$
|
92,227
|
|
$
|
-
|
|
$
|
-
|
|
Investment
securities
|
|
|
729,844
|
|
|
729,844
|
|
|
1,980
|
|
|
719,357
|
|
|
8,507
|
|
Federal Home Loan Bank stock
|
|
|
12,148
|
|
|
12,148
|
|
|
-
|
|
|
12,148
|
|
|
-
|
|
Net loans (net of
allowance for loan losses)
|
|
|
1,469,370
|
|
|
1,394,586
|
|
|
-
|
|
|
-
|
|
|
1,394,586
|
|
Bank owned life insurance
|
|
|
26,228
|
|
|
26,228
|
|
|
-
|
|
|
26,228
|
|
|
-
|
|
|
|
FINANCIAL
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,915,569
|
|
$
|
1,916,030
|
|
$
|
-
|
|
$
|
1,916,030
|
|
$
|
-
|
|
Long-term
borrowings
|
|
|
120,000
|
|
|
120,032
|
|
|
-
|
|
|
120,032
|
|
|
-
|
|
|
|
Junior subordinated
debentures-variable
|
|
|
51,000
|
|
|
27,350
|
|
|
-
|
|
|
27,350
|
|
|
-
|
The Company’s Asset/Liability Management Committee (“ALCO”) oversees the
bank’s valuation process and reports such valuations to the Loan, Investment
& ALCO Committee of the Board of Directors. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and
cash equivalents
- The carrying amount is a
reasonable estimate of fair value.
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.
Trading securities held at December 31, 2012, are recorded at fair value
on a recurring basis and related solely to bonds, equity securities and mutual
funds held in a Rabbi Trust for benefit of the Company’s deferred compensation
plans. Fair values for trading securities are based on quoted market prices for
identical assets. Trading securities were recorded in other assets within
The Balance Sheet. Trading securities were approximately $.8 million and $.7 million
at December 31, 2012 and 2011, respectively.
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.
90
17. 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 Company’s balance sheet.
Loans
- The fair value of
loans disclosed and not measured on a recurring or nonrecurring basis is
estimated by discounting the future cash flows using the current rate at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. These estimates differentiate loans based on their
financial characteristics such as loan category, pricing features, and remaining
maturity. Prepayment and credit loss estimates are also incorporated into loan
fair value estimates as well as an additional liquidity discount to more closely
align the fair value with observed market prices.
Loans that are deemed impaired are measured on a nonrecurring basis and
based on the present value of expected future cash flows discounted at the
loan’s effective interest rate. Loans may also, as a practical expedient, be
measured at the loan’s observable market price or the fair market value of the
collateral less selling costs if the loan is collateral dependent.
Bank owned life insurance
– Bank owned life insurance is carried at the cash surrender value of all
policies, which approximates fair value.
Other real estate owned
- Management obtains
third party appraisals as well as independent fair market value assessments from
realtors or persons involved in selling OREO in determining the fair value of
particular properties. Accordingly, the valuation of OREO is subject to
significant external and internal judgment. Management 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.
91
17. 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 and liabilities are measured at fair value on a
nonrecurring basis after initial recognition such as loans held for sale, loans
measured for impairment and OREO. The Company did not have any loans held for
sale for the twelve months ended December 31, 2012. For the twelve months ended
December 31, 2011, loans held for sale were subject to the lower of cost or
market method of accounting. There was no impairment recognized on loans held
for sale at December 31, 2011. For the twelve months ended December 31, 2012,
loans amounting to $42.5 million in Bancorp’s loan portfolio were deemed
impaired. OREO that was taken into possession during 2012 was measured at fair
value less sales expense. In addition, during 2012, certain properties were
written down $3.0 million to reflect additional decreases in their fair market
value after initial recognition at the time the property was placed into
OREO.
|
|
|
|
|
|
Fair value measurements at December 31, 2012,
using
|
|
|
|
|
|
|
Quoted prices in
active
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
markets for
identical
|
|
Other observable
|
|
Significant
|
|
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
assets
|
|
inputs
|
|
unobservable
inputs
|
|
Impairment
|
|
|
|
December 31, 2012
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
recognized
|
|
Recurring fair value
measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
847
|
|
$
|
847
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
Available for sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
200
|
|
|
-
|
|
|
200
|
|
|
-
|
|
|
|
|
U.S. Government
agency securities
|
|
|
243,197
|
|
|
-
|
|
|
243,197
|
|
|
-
|
|
|
|
|
Corporate securities
|
|
|
9,138
|
|
|
-
|
|
|
-
|
|
|
9,138
|
|
|
|
|
Mortgage-backed
securities
|
|
|
425,113
|
|
|
-
|
|
|
425,113
|
|
|
-
|
|
|
|
|
Obligations of state and political subdivisions
|
|
|
82,679
|
|
|
-
|
|
|
82,679
|
|
|
-
|
|
|
|
|
Equity investments
and other securities
|
|
|
11,782
|
|
|
1,968
|
|
|
9,814
|
|
|
-
|
|
|
|
|
Total recurring assets measured at fair
value
|
|
$
|
772,956
|
|
$
|
2,815
|
|
$
|
761,003
|
|
$
|
9,138
|
|
|
|
|
|
|
Nonrecurring fair value
measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans measured for impairment
1
|
|
$
|
11,131
|
|
$
|
-
|
|
$
|
-
|
|
$
|
11,131
|
|
$
|
7,845
|
|
OREO
1
|
|
|
27,582
|
|
|
-
|
|
|
-
|
|
|
27,582
|
|
|
3,007
|
|
Total nonrecurring fair value
measurements
|
|
$
|
38,713
|
|
$
|
-
|
|
$
|
-
|
|
$
|
38,713
|
|
$
|
10,852
|
|
|
|
1
Fair value amounts exclude the
estimated selling costs of impaired loan collateral and OREO
properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
92
17. FAIR VALUE MEASUREMENT AND FAIR
VALUES OF FINANCIAL INSTRUMENTS
The Company
made no transfers between hierarchy levels in 2012. 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 during the year ended December 31, 2012. There
were no nonrecurring level 1 or 2 fair value measurements in 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 full
year 2012 and 2011:
|
|
|
Twelve months ended December 31, 2012
|
|
|
|
|
|
|
Gains
(loss)
|
|
Reclassification of
|
|
|
|
|
|
|
|
|
|
|
|
|
included in other
|
|
losses from adjustment
|
|
|
|
|
Balance
|
|
|
|
Balance January
|
|
comprehensive
|
|
for
impairment of
|
|
Purchases, Issuances,
|
|
December 31,
|
|
(Dollars in
thousands)
|
|
1, 2012
|
|
income (loss)
|
|
securities
|
|
and Sales
|
|
2012
|
|
Corporate securities
|
|
$
|
8,507
|
|
$
|
582
|
|
$
|
49
|
|
$
|
-
|
|
$
|
9,138
|
|
Fair value
|
|
$
|
8,507
|
|
$
|
582
|
|
$
|
49
|
|
$
|
-
|
|
$
|
9,138
|
|
|
|
|
|
Twelve months ended December 31, 2011
|
|
|
|
|
|
|
Gains
(loss)
|
Reclassification of
|
|
|
|
|
|
|
|
|
|
|
|
|
included in other
|
losses from adjustment
|
|
|
|
|
Balance
|
|
|
|
Balance January
|
|
comprehensive
|
for
impairment of
|
|
Purchases, Issuances,
|
|
December 31,
|
|
(Dollars in
thousands)
|
|
1, 2011
|
|
income (loss)
|
securities
|
|
and Sales
|
|
2011
|
|
Corporate securities
|
|
$
|
9,392
|
|
$
|
(1,064
|
)
|
$
|
179
|
|
$
|
-
|
|
$
|
8,507
|
|
Obligations of state
and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
957
|
|
|
(109
|
)
|
|
-
|
|
|
(848
|
)
|
|
-
|
|
Fair
value
|
|
$
|
10,349
|
|
$
|
(1,173
|
)
|
$
|
179
|
|
$
|
(848
|
)
|
$
|
8,507
|
The losses
from adjustments for OTTI of securities were recognized in noninterest income in
the consolidated income statement.
The following table presents quantitative information about Level 3 fair
value measurements for the twelve months ended December 31, 2012:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Valuation
|
|
Unobservable
|
|
|
|
|
Weighted
|
|
|
|
Fair Value
|
|
technique
|
|
inputs
|
|
Range
|
|
average
|
|
Corporate securities
|
|
$
|
9,138
|
|
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
|
|
7.27 - 8.52
|
%
|
|
7.80%
|
|
Loans measured for impairment
|
|
|
1,811
|
|
Income approach
|
|
Capitalization rate
|
|
6.75 - 8.00
|
%
|
|
7.27%
|
|
|
|
|
9,320
|
|
Market comparable
|
|
Adjustment to appraisal value
|
|
0
- 83.94
|
%
|
|
10.96%
|
|
OREO
|
|
|
6,248
|
|
Income approach
|
|
Capitalization rate
|
|
6.75 - 8.50
|
%
|
|
7.69%
|
|
|
|
|
21,334
|
|
Market comparable
|
|
Adjustment to appraisal value
|
|
0 - 78.37
|
%
|
|
8.83%
|
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 Company’s 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.
ALCO assesses the methodology and validates the model inputs for the
Level 3 pricing models quarterly. The ALCO and management review the
reasonableness of third-party cash flow estimates as well as market-based
discount factors and estimated liquidity spreads. The resulting fair value
estimates are compared to third party model estimates to confirm the model is
producing reasonable fair value estimates.
93
18. FINANCIAL INSTRUMENTS WITH OFF
BALANCE SHEET RISK
The Bank has
financial instruments with off balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as for on-balance sheet instruments. As of December
31, 2012, and 2011, outstanding commitments consist of the following:
|
|
|
Contract or
|
|
Contract or
|
|
|
|
Notional Amount
|
|
Notional
Amount
|
|
(Dollars in thousands)
|
|
December 31, 2012
|
|
December 31, 2011
|
|
Financial instruments
whose contract amounts represent credit risk:
|
|
|
|
|
|
|
|
Commitments to extend credit in the form of
loans
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
272,899
|
|
$
|
251,105
|
|
Real
estate construction
|
|
|
42,402
|
|
|
23,932
|
|
Real estate
mortgage
|
|
|
|
|
|
|
|
Mortgage
|
|
|
3,417
|
|
|
3,419
|
|
Home equity line of credit
|
|
|
139,235
|
|
|
150,196
|
|
Total
real estate mortgage loans
|
|
|
142,652
|
|
|
153,615
|
|
Commercial real
estate
|
|
|
14,507
|
|
|
10,993
|
|
Installment and consumer
|
|
|
9,407
|
|
|
9,907
|
|
Other
1
|
|
|
9,503
|
|
|
12,803
|
|
Standby letters of credit and financial
guarantees
|
|
|
8,745
|
|
|
8,349
|
|
Account overdraft
protection instruments
|
|
|
75,724
|
|
|
103,642
|
|
Total
|
|
$
|
575,839
|
|
$
|
574,346
|
|
|
1
|
The category “other” represents commitments
extended to clients or borrowers that have been extended but not yet fully
executed. These extended commitments are not yet classified nor have they
been placed into our loan system.
|
Commitments to extend credit are agreements to lend to a customer, as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Many of the commitments may expire without
being drawn upon; therefore total commitment amounts do not necessarily
represent future cash requirements. Each customer’s creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on the Bank’s credit evaluation of
the customer. Collateral held varies, but may include real property, accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial properties.
Total outstanding commitments of $575.8 million at December 31, 2012,
increased $1.5 million from December 31, 2011. During 2012, outstanding
commitments for commercial loans and real estate construction increased by $21.8
million and $18.5 million, respectively, while outstanding commitments for home
equity lines of credit and account overdraft protection instruments decreased by
$11.0 million and $27.9 million, respectively.
Standby letters of credit are conditional commitments issued to support a
customer’s performance or payment obligation to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
Interest rates on residential 1-4 family mortgage loan applications are
typically rate locked during the application stage for periods ranging from 15
to 45 days, the most typical period being 30 days. These loans are locked with
various qualified investors under a best-efforts delivery program. The Company
makes every effort to deliver these loans before their rate locks expire. This
arrangement generally requires the Bank to deliver the loans prior to the
expiration of the rate lock. Delays in funding the loans may require a lock
extension. The cost of a lock extension at times is borne by the borrower and at
times by the Bank. These lock extension costs paid by the Bank are not expected
to have a material impact on operations. This activity is managed daily.
94
19. PARENT COMPANY ONLY FINANCIAL DATA
The following
sets forth the condensed financial information of West Coast Bancorp on a
stand-alone basis:
WEST COAST BANCORP
UNCONSOLIDATED BALANCE SHEETS
|
As
of December 31 (Dollars in thousands)
|
|
2012
|
|
2011
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,884
|
|
$
|
8,696
|
|
Investment in bank subsidiary
|
|
|
378,826
|
|
|
352,187
|
|
Investment in other subsidiaries
|
|
|
3,083
|
|
|
4,914
|
|
Other assets
|
|
|
2,608
|
|
|
1,901
|
|
Total
assets
|
|
$
|
393,401
|
|
$
|
367,698
|
|
|
|
Liabilities and
stockholders’ equity:
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
|
$
|
51,000
|
|
$
|
51,000
|
|
Other liabilities
|
|
|
3,181
|
|
|
2,219
|
|
Total
liabilities
|
|
|
54,181
|
|
|
53,219
|
|
Stockholders’
equity
|
|
|
339,220
|
|
|
314,479
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
393,401
|
|
$
|
367,698
|
WEST COAST BANCORP
UNCONSOLIDATED STATEMENTS OF INCOME
|
Year ended December 31 (Dollars in thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends from Bank
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Other income
|
|
|
10
|
|
|
|
12
|
|
|
|
10
|
|
|
Total income
|
|
|
2,010
|
|
|
|
12
|
|
|
|
10
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,206
|
|
|
|
1,178
|
|
|
|
1,143
|
|
|
Other expense
|
|
|
854
|
|
|
|
887
|
|
|
|
961
|
|
|
Total expense
|
|
|
2,060
|
|
|
|
2,065
|
|
|
|
2,104
|
|
|
Loss before income taxes
and equity in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
undistributed earnings
(loss) of the subsidiaries
|
|
|
(50
|
)
|
|
|
(2,053
|
)
|
|
|
(2,094
|
)
|
|
Income tax benefit
|
|
|
799
|
|
|
|
801
|
|
|
|
816
|
|
|
Net loss before equity in
undistributed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings (loss) of the
subsidiaries
|
|
|
749
|
|
|
|
(1,252
|
)
|
|
|
(1,278
|
)
|
|
Equity in undistributed earnings of the
subsidiaries
|
|
|
22,757
|
|
|
|
35,029
|
|
|
|
4,503
|
|
|
Net income
|
|
$
|
23,506
|
|
|
$
|
33,777
|
|
|
$
|
3,225
|
|
There were no
items of other comprehensive income for the parent company.
95
19. PARENT COMPANY ONLY FINANCIAL DATA
WEST COAST BANCORP
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year ended December 31
(Dollars in thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
23,506
|
|
|
$
|
33,777
|
|
|
$
|
3,225
|
|
|
Adjustments to reconcile net income to net
cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed (earnings) loss of subsidiaries
|
|
|
(22,757
|
)
|
|
|
(35,029
|
)
|
|
|
(4,503
|
)
|
|
(Increase) decrease in other assets
|
|
|
(719
|
)
|
|
|
(168
|
)
|
|
|
(892
|
)
|
|
Increase (decrease) in other liabilities
|
|
|
(64
|
)
|
|
|
(2,197
|
)
|
|
|
(1,294
|
)
|
|
Excess
tax benefit associated with stock plans
|
|
|
(124
|
)
|
|
|
(66
|
)
|
|
|
-
|
|
|
Stock
based compensation expense
|
|
|
1,545
|
|
|
|
1,899
|
|
|
|
2,089
|
|
|
Net cash (used) provided by operating activities
|
|
|
1,387
|
|
|
|
(1,784
|
)
|
|
|
(1,375
|
)
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contribution to subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,300
|
)
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,300
|
)
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in deferred compensation plan
|
|
|
53
|
|
|
|
(27
|
)
|
|
|
262
|
|
|
Proceeds from issuance of common stock
|
|
|
151
|
|
|
|
80
|
|
|
|
16,393
|
|
|
Fractional share payment
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
-
|
|
|
Redemption of stock pursuant to stock plans
|
|
|
(501
|
)
|
|
|
(531
|
)
|
|
|
(35
|
)
|
|
Excess
tax benefit associated with stock plans
|
|
|
124
|
|
|
|
66
|
|
|
|
-
|
|
|
Cash
dividends paid
|
|
|
(1,026
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,199
|
)
|
|
|
(430
|
)
|
|
|
16,620
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
188
|
|
|
|
(2,214
|
)
|
|
|
(55
|
)
|
|
Cash and cash equivalents at beginning of
year
|
|
|
8,696
|
|
|
|
10,910
|
|
|
|
10,965
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
8,884
|
|
|
$
|
8,696
|
|
|
$
|
10,910
|
|
During the
year ended December 31, 2010, the Parent Company made non-cash capital
contributions of $.53 million to the Bank in the form of an intercompany tax
settlement. No such contributions were made during the year ended December 31,
2011, and 2012.
96
20. SEGMENT AND RELATED INFORMATION
Bancorp
accounts for intercompany fees and services at a fair value according to
regulatory requirements for the service provided. Intercompany items relate
primarily to the use of accounting, human resources, data processing and
marketing services provided by the Bank, West Coast Trust, and the holding
company. All other accounting policies are the same as those described in the
summary of significant accounting policies.
Summarized financial information concerning Bancorp’s reportable segments
and the reconciliation to Bancorp’s consolidated results is shown in the
following table. The “Other” column includes West Coast Trust’s operations and
holding company related items including activity relating to trust preferred
securities. Investment in subsidiaries is netted out of the presentations below.
The “Intercompany” column identifies the intercompany activities of revenues,
expenses and other assets, between the “Banking” and “Other” segment.
|
|
|
As of and for the year
ended
|
|
(Dollars in thousands)
|
|
December 31, 2012
|
|
|
|
Banking
|
|
Other
|
|
Intercompany
|
|
Consolidated
|
|
Interest income
|
|
$
|
91,292
|
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
91,324
|
|
|
Interest expense
|
|
|
3,090
|
|
|
|
1,206
|
|
|
|
-
|
|
|
|
4,296
|
|
|
Net interest income
(loss)
|
|
|
88,202
|
|
|
|
(1,174
|
)
|
|
|
-
|
|
|
|
87,028
|
|
|
Provision (benefit) for credit
losses
|
|
|
(983
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(983
|
)
|
|
Noninterest
income
|
|
|
29,836
|
|
|
|
3,060
|
|
|
|
(1,069
|
)
|
|
|
31,827
|
|
|
Noninterest expense
|
|
|
81,501
|
|
|
|
3,653
|
|
|
|
(1,069
|
)
|
|
|
84,085
|
|
|
Income (loss) before
income taxes
|
|
|
37,520
|
|
|
|
(1,767
|
)
|
|
|
-
|
|
|
|
35,753
|
|
|
Provision (benefit) for income
taxes
|
|
|
12,936
|
|
|
|
(689
|
)
|
|
|
-
|
|
|
|
12,247
|
|
|
Net income
(loss)
|
|
$
|
24,584
|
|
|
$
|
(1,078
|
)
|
|
$
|
-
|
|
|
$
|
23,506
|
|
|
|
|
Depreciation, amortization
and accretion
|
|
$
|
8,731
|
|
|
$
|
31
|
|
|
$
|
-
|
|
|
$
|
8,762
|
|
|
Assets
|
|
$
|
2,482,246
|
|
|
$
|
16,215
|
|
|
$
|
(10,281
|
)
|
|
$
|
2,488,180
|
|
|
Loans, net
|
|
$
|
1,465,481
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,465,481
|
|
|
Deposits
|
|
$
|
1,946,281
|
|
|
$
|
-
|
|
|
$
|
(10,281
|
)
|
|
$
|
1,936,000
|
|
|
Equity
|
|
$
|
376,826
|
|
|
$
|
(37,606
|
)
|
|
$
|
-
|
|
|
$
|
339,220
|
|
|
|
|
|
|
As of and for the year
ended
|
|
(Dollars in thousands)
|
|
December 31, 2011
|
|
|
|
Banking
|
|
Other
|
|
Intercompany
|
|
Consolidated
|
|
Interest income
|
|
$
|
98,629
|
|
|
$
|
46
|
|
|
$
|
-
|
|
|
$
|
98,675
|
|
|
Interest expense
|
|
|
16,743
|
|
|
|
1,178
|
|
|
|
-
|
|
|
|
17,921
|
|
|
Net interest income
(loss)
|
|
|
81,886
|
|
|
|
(1,132
|
)
|
|
|
-
|
|
|
|
80,754
|
|
|
Provision for credit losses
|
|
|
8,133
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,133
|
|
|
Noninterest
income
|
|
|
29,796
|
|
|
|
3,105
|
|
|
|
(1,082
|
)
|
|
|
31,819
|
|
|
Noninterest expense
|
|
|
88,298
|
|
|
|
3,659
|
|
|
|
(1,082
|
)
|
|
|
90,875
|
|
|
Loss before income
taxes
|
|
|
15,251
|
|
|
|
(1,686
|
)
|
|
|
-
|
|
|
|
13,565
|
|
|
Benefit for income taxes
|
|
|
(19,555
|
)
|
|
|
(657
|
)
|
|
|
-
|
|
|
|
(20,212
|
)
|
|
Net income
(loss)
|
|
$
|
34,806
|
|
|
$
|
(1,029
|
)
|
|
$
|
-
|
|
|
$
|
33,777
|
|
|
|
|
Depreciation, amortization
and accretion
|
|
$
|
8,964
|
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
8,994
|
|
|
Assets
|
|
$
|
2,424,832
|
|
|
$
|
15,636
|
|
|
$
|
(10,581
|
)
|
|
$
|
2,429,887
|
|
|
Loans, net
|
|
$
|
1,466,089
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,466,089
|
|
|
Deposits
|
|
$
|
1,925,567
|
|
|
$
|
-
|
|
|
$
|
(9,998
|
)
|
|
$
|
1,915,569
|
|
|
Equity
|
|
$
|
352,188
|
|
|
$
|
(37,709
|
)
|
|
$
|
-
|
|
|
$
|
314,479
|
|
97
20. SEGMENT AND RELATED INFORMATION
|
|
|
As of and for the year
ended
|
|
(Dollars in thousands)
|
|
December 31, 2010
|
|
|
|
Banking
|
|
Other
|
|
Intercompany
|
|
Consolidated
|
|
Interest income
|
|
$
|
105,510
|
|
$
|
66
|
|
|
$
|
-
|
|
|
$
|
105,576
|
|
Interest expense
|
|
|
21,126
|
|
|
1,143
|
|
|
|
-
|
|
|
|
22,269
|
|
Net interest income
(loss)
|
|
|
84,384
|
|
|
(1,077
|
)
|
|
|
-
|
|
|
|
83,307
|
|
Provision for credit losses
|
|
|
18,652
|
|
|
-
|
|
|
|
-
|
|
|
|
18,652
|
|
Noninterest
income
|
|
|
30,789
|
|
|
3,053
|
|
|
|
(1,145
|
)
|
|
|
32,697
|
|
Noninterest expense
|
|
|
87,841
|
|
|
3,641
|
|
|
|
(1,145
|
)
|
|
|
90,337
|
|
Income (loss) before
income taxes
|
|
|
8,680
|
|
|
(1,665
|
)
|
|
|
-
|
|
|
|
7,015
|
|
Provision (benefit) for income
taxes
|
|
|
4,439
|
|
|
(649
|
)
|
|
|
-
|
|
|
|
3,790
|
|
Net income
(loss)
|
|
$
|
4,241
|
|
$
|
(1,016
|
)
|
|
$
|
-
|
|
|
$
|
3,225
|
|
|
|
Depreciation, amortization
and accretion
|
|
$
|
8,742
|
|
$
|
36
|
|
|
$
|
-
|
|
|
$
|
8,778
|
|
Assets
|
|
$
|
2,456,223
|
|
$
|
17,650
|
|
|
$
|
(12,814
|
)
|
|
$
|
2,461,059
|
|
Loans, net
|
|
$
|
1,496,053
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,496,053
|
|
Deposits
|
|
$
|
1,952,780
|
|
$
|
-
|
|
|
$
|
(12,258
|
)
|
|
$
|
1,940,522
|
|
Equity
|
|
$
|
310,487
|
|
$
|
(37,927
|
)
|
|
$
|
-
|
|
|
$
|
272,560
|
21. RELATED PARTY
TRANSACTIONS
As of December
31, 2012, the Bank had loan commitments to directors, senior officers, principal
stockholders and their related interests totaling $.2 million, a decrease of
$5.3 million from December 31, 2011. These commitments and the loan balances
below were made substantially on the same terms in the course of ordinary
banking business, including interest rates, maturities and collateral as those
made to other customers of the Bank.
The following table presents a summary of outstanding balances for loans
made to directors, senior officers, and principal stockholders of the Company
and their related interests:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
Balance, beginning of
period
|
|
$
|
5,552
|
|
|
$
|
5,039
|
|
|
New loans and advances
|
|
|
173
|
|
|
|
587
|
|
|
Principal payments and
payoffs
|
|
|
(5,512
|
)
|
|
|
(74
|
)
|
|
Balance, end of period
|
|
$
|
213
|
|
|
$
|
5,552
|
|
98
22. QUARTERLY FINANCIAL INFORMATION
(unaudited)
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share
data)
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
Interest income
|
|
$
|
22,424
|
|
|
$
|
22,726
|
|
|
$
|
22,841
|
|
|
$
|
23,333
|
|
Interest expense
|
|
|
989
|
|
|
|
1,039
|
|
|
|
1,068
|
|
|
|
1,200
|
|
Net interest
income
|
|
|
21,435
|
|
|
|
21,687
|
|
|
|
21,773
|
|
|
|
22,133
|
|
Provision (benefit) for credit
losses
|
|
|
13
|
|
|
|
(593
|
)
|
|
|
(492
|
)
|
|
|
89
|
|
Noninterest
income
|
|
|
7,274
|
|
|
|
8,172
|
|
|
|
8,494
|
|
|
|
7,887
|
|
Noninterest expense
|
|
|
20,277
|
|
|
|
21,307
|
|
|
|
21,476
|
|
|
|
21,025
|
|
Income before income
taxes
|
|
|
8,419
|
|
|
|
9,145
|
|
|
|
9,283
|
|
|
|
8,906
|
|
Provision for income taxes
|
|
|
2,680
|
|
|
|
3,201
|
|
|
|
3,249
|
|
|
|
3,117
|
|
Net income
|
|
$
|
5,739
|
|
|
$
|
5,944
|
|
|
$
|
6,034
|
|
|
$
|
5,789
|
|
|
|
Earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
1
|
|
$
|
0.28
|
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
0.28
|
|
|
$
|
0.27
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share
data)
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
Interest income
|
|
$
|
23,932
|
|
|
$
|
24,721
|
|
|
$
|
25,104
|
|
|
$
|
24,918
|
|
Interest expense
|
|
|
5,992
|
|
|
|
5,380
|
|
|
|
3,143
|
|
|
|
3,406
|
|
Net interest
income
|
|
|
17,940
|
|
|
|
19,341
|
|
|
|
21,961
|
|
|
|
21,512
|
|
Provision for credit losses
|
|
|
1,499
|
|
|
|
1,132
|
|
|
|
3,426
|
|
|
|
2,076
|
|
Noninterest
income
|
|
|
6,419
|
|
|
|
8,414
|
|
|
|
8,070
|
|
|
|
8,916
|
|
Noninterest expense
|
|
|
22,744
|
|
|
|
22,620
|
|
|
|
22,958
|
|
|
|
22,553
|
|
Income before income
taxes
|
|
|
116
|
|
|
|
4,003
|
|
|
|
3,647
|
|
|
|
5,799
|
|
Provision (benefit) for income
taxes
|
|
|
(17,646
|
)
|
|
|
(2,273
|
)
|
|
|
(987
|
)
|
|
|
694
|
|
Net income
|
|
$
|
17,762
|
|
|
$
|
6,276
|
|
|
$
|
4,634
|
|
|
$
|
5,105
|
|
|
|
Earnings per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.87
|
|
|
$
|
0.31
|
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
Diluted
|
|
$
|
0.83
|
|
|
$
|
0.29
|
|
|
$
|
0.22
|
|
|
$
|
0.25
|
|
|
1
|
Due to averaging of
shares, quarterly earnings per share may not add up to the totals reported
for the full year
|
23. PROPOSED MERGER WITH COLUMBIA
BANKING SYSTEM, INC.
On September
25, 2012, Bancorp entered into an Agreement and Plan of Merger with Columbia
Banking System, Inc., a Washington corporation (“Columbia”), pursuant to which
Columbia will acquire Bancorp. Consummation of the transaction remains subject
to customary closing conditions, including receipt of requisite shareholder and
regulatory approvals
In connection with the proposed merger, Bancorp has incurred
merger-related expenses of approximately $1.7 million, principally legal and
professional services, for the twelve months ended December 31, 2012.
99
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
None.
ITEM 9A. CONTROLS AND
PROCEDURES
Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that
information the Company must disclose in its reports filed or submitted under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms and accumulated and
communicated to our management, including our CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Our management has
evaluated, with the participation and under the supervision of our chief
executive officer (“CEO”) and chief financial officer (“CFO”), the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act) as of the end of the period covered by this
report. Based on this evaluation, our CEO and CFO have concluded that, as of
such date, the Company’s disclosure controls and procedures are effective in
ensuring that information relating to the Company, including its consolidated
subsidiaries, required to be disclosed in reports that it files under the
Exchange Act is (1) recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and (2) accumulated and communicated to our management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
Material Changes in Internal Control
over Financial Reporting
There was no change in our internal
controls over financial reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
Management’s Report on Internal
Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company’s internal
control system is designed to provide reasonable assurance regarding the
preparation, reliability and fair presentation of published financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America. Management is also responsible for
ensuring compliance with the federal laws and regulations concerning loans to
insiders and the federal and state laws and regulations concerning dividend
restrictions, both of which are designated by the Federal Deposit Insurance
Corporation (“FDIC”) as safety and soundness laws and regulations. Nonetheless,
all internal control systems, no matter how well designed, have inherent
limitations. Even systems determined to be effective as of a particular date can
provide only reasonable assurance with respect to financial statement
preparation and presentation and may not eliminate the need for restatements.
The Company’s management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2012. In making
this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in
Internal Control—Integrated Framework
. Based on our assessment, we believe that, as of December 31,
2012, the Company’s internal control over financial reporting is effective based
on those criteria.
The Company’s management has assessed its compliance with the designated
safety and soundness laws and regulations and has maintained records of its
determinations and assessments as required by the FDIC. Based on this
assessment, management believes that West Coast Bancorp has complied, in all
material respects, with the designated safety and soundness laws and regulations
for the year ended December 31, 2012.
The Company’s independent registered public accounting firm has audited
the Company’s internal control over financial reporting as of December 31, 2012,
as stated in their report appearing below.
100
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
West Coast Bancorp
Lake Oswego, Oregon
We have audited the internal control
over financial reporting of West Coast Bancorp and subsidiaries (the “Company”)
as of December 31, 2012, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Because management’s assessment and our audit were
conducted to meet the reporting requirements of Section 112 of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment
and our audit of the Company’s internal control over financial reporting
included controls over the preparation of the schedules equivalent to the basic
financial statements in accordance with the instructions for the Consolidated
Financial Statements for Bank Holding Companies (Form FR Y-9C). The Company’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying management’s
report on internal control over financial reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over
financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of the inherent limitations of
internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2012, based on the criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have not examined and, accordingly,
we do not express an opinion or any other form of assurance on management’s
statement referring to compliance with laws and regulations.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended
December 31, 2012 of the Company and our report dated March 8, 2013 expressed an
unqualified opinion on those consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
|
Portland, Oregon
|
|
|
|
March 8, 2013
|
|
|
ITEM 9B.
OTHER
INFORMATION
None.
101
PART III
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
Information with Respect to
Directors
The directors
of Bancorp are listed below, together with certain biographical information. All
current directors of Bancorp also serve as Directors of the Bank.
Lloyd D.
Ankeny
,
75
Director since 1995
|
|
Mr.
Ankeny is Chair of our Board of Directors. He has been a private real
estate investor for more than five years. Prior to entering the real
estate field, Mr. Ankeny held management positions with IBM and Xerox
Corporations. Mr. Ankeny has been a Bank Director since 1986. Mr. Ankeny
was selected for his leadership skills, prior management experience,
lengthy history and familiarity with the Company, the Bank, their
respective operations, the banking business generally, and his knowledge
of real estate.
|
|
|
|
|
|
David A
Dietzler
,
69
Director since 2012
|
|
Mr. Dietzler is a certified public
accountant. He built his career at one of the world’s largest audit, tax
and advisory services firms, KPMG LLP in Portland, and retired in 2005
after 37 years of service. His responsibilities at KPMG LLP included the
role of managing partner of the Portland office for twenty years and
holding various leadership roles for the Pacific Northwest offices for
eleven years. Mr. Dietzler has extensive experience auditing public
companies and working with audit committees. He has gained significant
expertise in SEC reporting, financial statement preparation, and internal
control and compliance requirements. Mr. Dietzler has been a Director of
Portland General Electric Company since 2006 where he chairs the audit
committee.
|
|
|
|
|
Henchy R. Enden
, 40
Director since 2012
|
|
Ms. Enden has been employed for more than five years by MFP
Investors, LLC, the investment advisor to MFP Partners, L.P. Ms. Enden was
nominated at the recommendation of MFP Partners, L.P., an investor in the
Company’s October 2009 capital raise. Ms. Enden is an Equity Analyst with
a background in investments and finance and has an MBA from Columbia
Business School.
|
|
|
|
|
Shmuel (Sam) Levinson
, 39
Director since 2011
|
|
Mr. Levinson is currently the managing
Director of Levinson Capital Management, LLC, a private equity investment
advisor. Since 1996, he has also been the principal of Trapeze, Inc., a
commercial and residential development company. Mr. Levinson has been a
Director of Coleman Cable, Inc. since 2005. He is also a Director of
Optician Medical, Inc., a medical device manufacturer; Canary Wharf Group,
PLC, a real estate development and investment group; and Song Bird
Estates, PLC, a real estate investment company. Mr. Levinson was nominated
at the request of GF Financial, LLC. Mr. Levinson has an extensive
background in investment management and real estate.
|
|
|
|
|
|
Steven J.
Oliva
, 72
Director since 2003
|
|
Mr. Oliva has served as President and Chief
Executive Officer of Hi-School Pharmacy, Inc., for more than five years.
Hi-School Pharmacy & Affiliates is a retail drug and hardware store
with 25 locations in two western states and over 425 employees. Mr. Oliva
is a board member of the National Association of Chain Drug Stores and
Oregon State University Advisory Board—School of Pharmacy, Emeritus. He is
also a real estate investor. Mr. Oliva was selected for his familiarity
with the Company and his knowledge of the pharmaceutical industry and real
estate markets. He is also well-regarded and active within our community.
|
102
John
T. Pietrzak
, 40
Director since
2010
|
|
Mr.
Pietrzak has been a principal of Castle Creek Capital LLC, a merchant
banking organization that specializes in bank investments and operations,
since 2008 and a Director from 2005 to 2008. Prior to joining Castle
Creek, he was a Director of Demand Planning for Levi Strauss & Co. Mr.
Pietrzak is also a Director of Square 1 Financial Inc. and Panhandle State
Bank. Mr. Pietrzak was nominated at the recommendation of Castle Creek
Partners IV, LP. Mr. Pietrzak has a background in investments, retail
planning, and a current focus on investments in community
banks.
|
|
|
|
|
|
Steven
N. Spence
, 65
Director since
2001
|
|
Mr. Spence has been a Senior Vice President
of RBC Wealth Management, Inc. since 2009. Previously, he was Senior Vice
President of UBS Financial Services Inc., a securities brokerage firm, and
its predecessors in Portland, Oregon, for more than thirty eight years.
His duties at RBC include advising private clients under the Investment
Advisor Act of 1940 on a discretionary basis. Mr. Spence was selected for
his leadership skills, his familiarity with the Company and the banking
business, and his background and high profile within the investment
management community.
|
|
|
|
|
Robert D. Sznewajs
, 66
Director since 2000
|
|
Mr. Sznewajs has been President and Chief Executive Officer of
Bancorp and the Bank for more than five years. Mr. Sznewajs has also been
a Director of Coinstar Inc. for more than five years. Mr. Sznewajs was
selected for his leadership skills, his position as President & CEO of
the Company, and his knowledge of the Company and the banking
business.
|
|
|
|
|
Dr. Nancy A.
Wilgenbusch
, 65
Director since 2003
|
|
Dr. Wilgenbusch has been President Emerita
of and advisor to Marylhurst University since 2008. Previously she was
President of Marylhurst University for more than five years. Dr.
Wilgenbusch has served as a Director of Cascade Corporation and as a
trustee of Tax-Free Trust of Oregon and has done so for more than five
years. She previously served as a Director of Scottish Power from 2004 to
2007. Dr. Wilgenbusch was selected for her knowledge of the Company, her
background in education and auditing, and high profile within our
community.
|
Information with Respect to
Executive Management Team
Information
with respect to our executive management team, other than Mr. Sznewajs, appears
below. Information relating to Mr. Sznewajs, who is also a Director, can be
found above under "Information with Respect to Directors." Each of the executive
officers listed below serves in the position listed at both Bancorp and the
Bank.
|
James D. Bygland,
51
|
|
Mr. Bygland has served as Executive
Vice President and Chief Information Officer for more than five
years.
|
|
|
|
|
|
Anders Giltvedt, 53
|
|
Mr. Giltvedt has served as Executive Vice President and Chief
Financial Officer for more than five years.
|
|
|
|
|
|
Kevin McClung, 43
|
|
Mr. McClung has served as Senior Vice President., Controller and
Principal Accounting Officer for more than five years.
|
|
|
|
|
|
Xandra McKeown, 54
|
|
Ms. McKeown has served as Executive Vice President and Manager of
the Commercial Banking Group for more than five years.
|
|
|
|
|
|
Hadley S. Robbins, 55
|
|
Mr. Robbins has served as Executive Vice President and Chief Credit
Officer for more than five years.
|
|
|
|
|
|
Cynthia J. Sparacio, 60
|
|
Ms. Sparacio has served as Executive Vice President and Director of
Human Resources for more than five years.
|
103
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as
amended ("Section 16(a)"), requires that all of our executive officers and
directors and all persons who beneficially own more than 10% of our common stock
("reporting persons") file reports with the SEC with respect to beneficial
ownership of Bancorp common stock. We have adopted procedures to assist our
directors and executive officers in complying with the Section 16(a) filing
requirements.
Based solely upon our review of the copies of filings that we received
with respect to the year ended December 31, 2012, and written representations
from reporting persons, we believe that all executive officers and directors
made all filings required by Section 16(a) on a timely basis during 2012, except
that: (i) Ms. Enden filed a late Form 3 on January 25, 2012; and (ii) Messrs.
Sznewajs, Giltvedt and McClung and Mses. McKeown and Sparacio, each filed a late
Form 4 in May 2012, reporting dispositions of shares that occurred in 2011 and
2012 to satisfy withholding tax obligations arising out of the vesting of
restricted stock. The number of prior transactions reported varied based on
whether the officer in each instance elected to satisfy his or her tax
obligations in shares.
In addition, (i) during fiscal year 2011, each of the Company's directors
and executive officers filed, during the period between June 6 and June 17,
2011, one late Form 4 reporting restricted stock grants made on May 27 and 28,
2011, and (ii) in March 2013, each of the Company’s executive officers reported
the forfeiture of certain performance-based restricted stock that occurred in
September 2011.
Code of Ethics
We have adopted a code of ethics (the "Code of Ethics"), for our CEO,
CFO, principal accounting officer, and persons performing similar functions,
entitled the West Coast Bancorp Code of Ethics for Senior Financial Officers.
The Code of Ethics is available on our website at www.wcb.com under the tab for
investor relations. Stockholders may request a free copy of the Code of Ethics
from:
West Coast
Bancorp
Attention: Assistant
Secretary
5335 Meadows Road,
Suite 201
Lake Oswego, Oregon
97035
(503) 598-3248
Audit and Compliance
Committee
Bancorp has a separately-designated standing Audit and Compliance
Committee established in accordance with Section 3(a)(58)(A) of the Exchange
Act. The members of the Audit and Compliance Committee are David Dietzler
(Chair), Henchy Enden, Nancy Wilgenbusch, and Lloyd Ankeny, each of whom is
independent as independence for audit committee members is defined under NASDAQ
listing standards applicable and SEC rules to the Company.
Audit Committee Financial
Expert
Bancorp's Board of Directors has determined that David Dietzler is an
audit committee financial expert as defined in Item 407(d)(5) of Regulation S-K
of the Exchange Act and is independent as independence for audit committee
members is defined under NASDAQ listing standards and SEC rules applicable to
the Company.
104
ITEM 11.
EXECUTIVE
COMPENSATION
Compensation Discussion &
Analysis
As part of our discussion of executive compensation in
this report, we provide summaries of and derive examples from various plans and
agreements, such as employment agreements, change in control agreements, equity
incentive plans, and supplemental executive retirement agreements, which are
complicated legal documents. For additional information regarding these legal
documents, we refer you to the complete documents as they have been incorporated
into this report. The Exhibit Index in this annual report directs you to where
each of the exhibits incorporated into this annual report, including all
compensatory agreements with our named executive officers, can be found. All of
these documents can be obtained on the SEC website. All summaries or examples
derived from these documents that are included in this report are qualified in
their entirety by reference to the actual legal documents.
Company Performance.
Our corporate goals in recent years have been to return the Company to
profitability on a consistent basis at levels equal to our peers, reduce the
level of non-performing loans, maintain a stable net interest margin, increase
our levels of capital, control operating expenses consistent with levels of
operating income, maintain a high degree of customer satisfaction, and retain
and reward our employees.
During 2012, the Company returned to a consistent level of profitability,
reporting net income of $23.5 million and a Return on Assets (“ROA”) of .97% for
the full year. The Company also continued to significantly reduce the level of
non-performing assets, reducing such assets by an additional 42% to $41 million
at December 31, 2012, or less than 2% of total assets.
Summary of Key Compensation Decisions.
-
Chief Executive
Officer Compensation
: On February 1, 2012,
Mr. Sznewajs salary was increased to $450,000. Mr. Sznewajs did not receive
any stock grants in 2012. Mr. Sznewajs was awarded a cash bonus equal to
$325,000, representing 72% of salary or 144% of his target bonus in 2012.
There is no salary change for 2013 for Mr. Sznewajs.
-
Other Named Executive Officer
Compensation
: On February 1, 2012, all four
other named executive officers received salary increases bringing salary to
$235,000 for Mr. Giltvedt, $216,000 for Ms. McKeown and Mr. Robbins, and
$200,000 for Ms. Sparacio. Each named officer (other than Mr. Sznewajs)
received a cash bonus ranging from 21% to 35% of salary, vested (based on
continued employment) and were paid cash retention awards that were granted in
2010, and received restricted stock grants in 2012. There is no salary change
for 2013 for the named executive officers.
Say-on-Pay.
At
the Company’s 2011 Annual Meeting, the Company presented a proposal on how
frequently the Company should hold an advisory vote on the compensation of the
Company’s named executive officers. A majority of the shareholders voted in
favor of a three-year frequency. Accordingly, the Company’s shareholders did not
take an advisory vote on the compensation of the Company’s named executive
officers at the 2012 Annual Meeting. The most recent advisory say-on-pay for the
Company was at the 2011 Annual Meeting, at which 85.72% of the votes cast on the
advisory vote on executive compensation approved the compensation of the
Company's named executive officers. The vote results demonstrate support for our
current executive compensation program.
Objectives and Basis for
Compensation
. The objectives of our
compensation program for named executive officers are to attract, retain,
motivate and reward highly qualified executives. As a general practice, the
Compensation Committee targets total compensation of each named executive
officer at the 50
th
to 65
th
percentile of the total
compensation of executives holding similar positions at similarly situated bank
holding companies, as modified upward or downward by the following factors:
-
length of time in
the position,
-
scope of job responsibilities,
-
current and long term job performance and
potential for advancement,
-
competitive market conditions for individuals
holding similar positions, and
-
the annual and longer term performance of our
company.
Total executive compensation may also be affected by decisions to pay
higher levels of compensation in order to attract superior executive talent in
critical functions or to provide additional compensation outside of the normal
annual review cycle to address retention issues.
105
To assist the
Compensation Committee in achieving the objectives of our compensation programs
for executive officers, the Compensation Committee has on a periodic basis
retained the services of an independent consultant to conduct surveys and
provide reports, updates and related advice to the Compensation Committee
regarding compensation paid to executive officers at similarly situated bank
holding companies that hold positions similar to those of our named executive
officers. In 2012, the Compensation Committee reviewed its relationship with
McLagan, an Aon Hewitt company, (the "Consultant"). The Compensation Committee
considered all relevant factors, including those set forth in Rule
10C01(b)(4)(i) through (vi) under the Securities Exchange Act of 1934. The
Committee determined that McLagan and Aon Hewitt’s work does not raise a
conflict of interest and retained McLagan to perform consulting services. The
Consultant provided the Compensation Committee with a report regarding executive
compensation based on information derived from a banking and financial industry
compensation survey and a customized survey of a peer group ("the peer group")
composed of the bank holding companies listed under the subsection "Bank Holding
Company Peer Group" below.
The Compensation Committee periodically compares the total annual
compensation of each named executive officer to the total annual compensation of
executives holding comparable positions at similarly situated bank holding
companies. For the purpose of such comparisons, the Compensation Committee
considers base salary, annual bonus, and the value of stock options and
restricted stock grants. The Compensation Committee focuses primarily on total
annual compensation rather than the various individual elements of compensation
because total annual compensation is generally most important to executives.
Further, focusing on total annual compensation allows us more flexibility to
provide forms of compensation that are tailored to meet our goals and the
particular executive's needs and wishes, either at the time of hire or later in
the employment relationship. The Compensation Committee does not focus on
supplemental executive retirement plans, life insurance, change in control
agreements, and other compensation elements in its comparisons because it does
not believe such comparisons are particularly meaningful, it is difficult to
assign a value to certain elements, and it is not believed to be industry
practice to do so.
According to updated information provided by our Consultant, the 2012
total direct compensation of each of our named executive officers is at the
following percentile of the peer group: Mr. Sznewajs: 66
th
percentile; Mr. Giltvedt: 64
th
percentile; Ms. McKeown:
67
th
percentile; Mr. Robbins: 89
th
percentile; Ms.
Sparacio: 5% above the median. Data used in the 2011 study was aged 6% (3% per
year) to provide updated comparisons.
Based on the Compensation Committee’s review of the compensation
arrangements discussed below, and our assessments of individual and corporate
performance, the Compensation Committee believes the Company’s executive
compensation levels and the design of the executive compensation programs are
effective.
Goals
. The
compensation program and its various elements are designed to reward a
combination of individual, department and/or corporate performance. How the
various elements of the compensation program are designed to reward such
performance is explained more fully below.
Elements of Compensation
. The primary elements of our compensation program for named executive
officers are base salary, annual bonus, stock options and restricted stock. In
addition, although not a normal part of our compensation program, in May 2010,
we made certain retention awards to named executive officers other than our
Chief Executive Officer (“CEO”), which vested and were paid out in 2012. We also
provide executives certain life insurance, change in control and supplemental
retirement benefits, and we offer executive officers an opportunity to
participate in non-qualified deferred compensation plans. We have an employment
contract with our President & CEO. In addition, named executive officers are
eligible to receive other benefits that are generally available to all employees
on a non-discriminatory basis, such as participation in and matching
contributions under our 401(k) plan, vacations, and medical, dental, life,
disability, and long term care insurance.
106
Base
Salaries
. Effective February 1, 2012, base
salaries for Messrs. Sznewajs, Giltvedt, Robbins, Ms. McKeown and Ms. Sparacio
were increased as follows:
|
|
2012 Base
|
% Increase
|
|
|
Name
|
Salary
|
from 2011
|
Basis for Increase
|
|
Robert D.
Sznewajs
|
$ 450,000
|
7%
|
To move his base
salary closer to the 50
th
percentile of the peer group, to
reward him for his contribution to the improved performance of the
Company, and to off-set, in part, his forfeiture of any future stock
awards pursuant to the terms of his Employment Agreement.
|
|
|
|
|
|
|
Anders Giltvedt
|
$ 235,000
|
14%
|
To
reward him for his contributions to the improved performance of the
Company.
|
|
|
|
|
|
|
Hadley S.
Robbins
|
$ 216,000
|
5%
|
To
reward him for his contributions to the improved performance of the
Company.
|
|
|
|
|
|
|
Xandra McKeown
|
$ 216,000
|
5%
|
To
reward her for her contributions to the improved performance of the
Company.
|
|
|
|
|
|
|
Cynthia
Sparacio
|
$ 200,000
|
21%
|
To
reward her for her contributions to the improved performance of the
Company.
|
|
|
|
|
|
These base
salaries for 2012 represent an increase for the CEO of $30,000 and for the other
named executive officers an aggregate increase of $84,000 from 2011 levels, and
was awarded for the reasons described above. For 2012, base salaries were at the
following percentiles of the peer group: Mr. Sznewajs 41
st
percentile, Mr. Giltvedt 29
th
percentile, Ms. McKeown 41
st
percentile, Mr. Robbins 48
th
percentile, and Ms. Sparacio 5% below
the median of survey data.
Annual Bonuses
.
Annual bonuses were paid to all named executive officers for
2012 achievements.
Annual bonuses allow named executive officers to earn additional annual
cash compensation if performance goals and certain objective and subjective
criteria are satisfied. The bonus paid each named executive officer is a
function of the executive's bonus opportunity, the achievement of individual,
department and/or corporate performance goals, and the Compensation Committee's
discretion.
The bonus opportunity of each named executive officer is a percentage of
his or her base salary and, except in the case of our CEO, is proposed by the
President and CEO and reviewed and approved annually by the Compensation
Committee. For example, an executive with a base salary of $200,000 and a bonus
opportunity of 50% has an opportunity to earn a bonus of $100,000, subject to
achievement of individual, department and Company performance goals and to the
discretion of the Compensation Committee. The bonus paid may be more or less
than the amount of the bonus opportunity. This structure gives the Compensation
Committee latitude to weigh factors it considers important when considering
executive bonuses, including subjective factors.
107
The bonus opportunity and the percentage of that opportunity that is
allocated between individual, department and corporate goals for each named
executive officer is as follows:
|
|
|
Percent
of Bonus Opportunity
|
|
|
|
|
|
Allocated
to Achievement of
|
2012
Award
|
|
|
Bonus
|
|
|
|
|
|
|
Opportunity %
|
Individual and
|
Corporate
|
|
Bonus %
of
|
|
|
of Salary
|
Department
Goals
|
Goals
|
Bonus $
|
Salary
|
|
Robert
D. Sznewajs
|
50%
|
0%
|
100%
|
$
325,000
|
72%
|
|
Anders
Giltvedt
|
60%
|
25%
|
75%
|
75,000
|
32%
|
|
Xandra
McKeown
|
50%
|
50%
|
50%
|
75,000
|
35%
|
|
Hadley
S. Robbins
|
50%
|
50%
|
50%
|
75,000
|
35%
|
|
Cynthia
Sparacio
|
30%
|
50%
|
50%
|
42,000
|
21%
|
The individual
and department performance goals for each of our named executive officers were
as follows:
|
Officer
|
Performance Goal
Areas
|
|
Robert D.
Sznewajs
|
Provide leadership
relative to the Company's future strategic planning, set short and long
term goals for profitability, interact with the Board and regulatory
agencies, achieve the annual budget and long term financial plan, and
attract and retain an effective management team, oversee the merger
integration.
|
|
|
|
|
Anders Giltvedt
|
Oversee financial
reporting, corporate risk management, and audit, asset/liability and
capital management, manage corporate projects and quality of reporting to
the Board and its Audit & Compliance and Loan Committees, including
merger integration planning.
|
|
|
|
|
Xandra McKeown
|
Oversee the
origination and sale of certain commercial, industrial and real estate
loans, cross-sell deposit and related products, achieve reduction in
non-performing assets, and facilitate commercial customer retention and
satisfaction.
|
|
|
|
|
Hadley S.
Robbins
|
Responsible for the
Company’s credit policies, credit quality, loan losses, reduction in
non-performing assets, enhancement of credit administration practices, and
quality of reporting to the Board and its Loan Committee, including merger
integration planning.
|
|
|
|
|
Cynthia Sparacio
|
Responsible for
planning, organizing and directing the human resource functions and
activities of the Company, including compensation, employment, employee
relations, employee development and organizational development
.
|
|
|
|
In 2012, the
Company's achievements included a ROA of .97%, net income of $23.5 million,
improved capital ratios, and a $30 million decrease in non-performing assets to
1.66% of total assets. The results relating to earnings and capital ratios were
very favorable to the Company's peer group as shown in the Bank Holding Company
Peer Group table.
As a result the Company's 2012 performance executive officers were
awarded bonus payments ranging from 21% to 72% of salary. These bonus payments
were determined by the Compensation Committee after evaluating the overall
performance of the Company relative to peers, individual and corporate
performance relative to goals and the need to retain talented executives.
With respect to Mr. Sznewajs, it should be noted in accordance with his
most recent employment agreement, effective January 1, 2011, and discussed under
the subheading within this section "Employment Contract with the CEO," he is not
entitled to any additional equity grants during the term of the Employment
Agreement. Accordingly, Mr. Sznewajs received no equity grants in 2012 and will
not receive any in 2013. As part of the negotiation of the new employment
agreement, the Company agreed to certain changes to Mr. Sznewajs Supplemental
Executive Retirement Plan (“SERP”) agreement, as described under the subheading
within this section "Supplemental Executive Retirement Plans." The Compensation
Committee believes that given Mr. Sznewajs’ substantial stock holdings, his
interests are closely aligned with those of shareholders and future incentive
compensation would generally be awarded as part of his annual performance
evaluation rather than through any additional equity grants.
108
Restricted
Stock and Stock Options
. Restricted stock and
stock options provide the Compensation Committee with important tools to
attract, retain, motivate and reward named executive officers and to further
align the interests of management with those of our shareholders. Restricted
stock and stock option awards are designed to strengthen the mutuality of
interests between Bancorp's shareholders and named executive officers by
providing a portion of annual compensation in a form that gives the executive a
proprietary interest in pursuing the long-term growth, profitability, and
financial success of Bancorp. Stock option grants provide an additional
incentive for named executive officers to build shareholder value since
recipients only receive value from the grants if the price of our stock
appreciates. The Company has only issued restricted stock awards to its
executive officers during the past two years.
In 2012, restricted stock was granted to Mr. Giltvedt, Ms. McKeown, Mr.
Robbins that vests 25% each year for four years, and to Ms. Sparacio that vests
33-1/3% each year for three years (due to retirement eligibility). The vesting
period helps retain named executive officers and is generally consistent with
industry practice. We chose to grant restricted stock to encourage long-term
shareholder value as opposed to solely motivating based on stock price
increases.
The number of shares granted to each named executive officer was
determined based on individual performance, the executive's potential, and a
formula that takes into account the total number of shares being granted to all
employees (as determined by total dollars available for all such grants), the
executive's salary, and a multiplier based on the executive's job grade.
2010 Retention Awards
. In May 2010,
in consideration of the challenges confronting the Company, retention awards
were granted to retain key employees to reward them for their efforts in raising
capital, reducing non-performing assets, controlling operating expenses and
retaining customers and employees during 2010. To earn the full award, each
employee was required to remain employed by the Company through May 1, 2012.
|
Name
|
|
Paid May 1, 2012
|
|
Anders Giltvedt
|
|
$ 60,000
|
|
Hadley S.
Robbins
|
|
$ 50,000
|
|
Xandra McKeown
|
|
$ 50,000
|
|
Cynthia
Sparacio
|
|
$
21,060
|
Mr. Sznewajs did not receive a retention award in 2010.
Supplemental Executive Retirement Plans
. The Compensation Committee approved entry into supplemental executive
retirement agreements ("SERPs") with Mr. Sznewajs (restated January 2011), Mr.
Giltvedt and Ms. McKeown in 2003 and with Mr. Robbins in 2007. In connection
with the restatement of Mr. Sznewajs’ SERP in January 2011, the Company
increased the percentage of annual base salary upon which Mr. Sznewajs’ SERP
benefit is based to 45%, effective on January 1, 2011 and as part of the
negotiation of his new employment contract. The SERPs were implemented to help
retain key executives and provide compensation that is competitive with others
in our peer group.
The SERPs, as amended in 2005 and again in 2009, tie the benefit provided
to a percentage of final base salary. All named executive officers have elected
to receive their SERP benefits in a lump sum payment rather than in installments
over 15 years, except that Mr. Giltvedt has elected a lump sum only in the event
of benefits triggered by death (and Mr. Giltvedt otherwise receives payments in
installments over 15 years). Each SERP includes non-compete and non-solicitation
provisions. For more detailed discussion of the SERPs, see the discussion in
this section below under the subheading "Pension Benefits for 2012."
Life Insurance
. In 2003, we
purchased bank-owned life insurance for Mr. Sznewajs, Mr. Giltvedt, Ms. McKeown
and Ms. Sparacio and other officers of the Company to help recover the costs of
projected employee benefits, provide key executives with another element of a
comprehensive and competitive compensation package, reward those persons for
past and future services, and encourage them to continue employment with us. In
2007, we purchased a term life insurance policy for Mr. Robbins. Life insurance
benefits under the policies are $300,000 for Mr. Sznewajs and $200,000 for each
of Ms. McKeown and Ms. Sparacio and Messrs. Giltvedt and Robbins. Additional
life insurance coverage is provided under policies available to all
employees.
109
Change in
Control Agreements
. The Compensation
Committee approved entry into change in control agreements ("CIC's") for Mr.
Sznewajs, Mr. Giltvedt, Ms. McKeown and Ms. Sparacio in 2003 and Mr. Robbins in
2007. All CIC’s were updated to comply with section 409A of the Internal Revenue
Code (the “Code”). The CICs were implemented to help us retain the executives
(particularly after a change in control has been proposed) and remain
competitive with others in our peer group and in our market. The CICs with Ms.
McKeown and Mr. Robbins will be superseded by the employment agreements that
each of them entered into with Columbia in connection with Bancorp entering into
the definitive merger agreement that will become effective upon the consummation
of the merger with Columbia.
Benefits under the CICs are payable to each named executive officer upon
the occurrence of events described in the CICs. Those events require both a
change in control (as defined in the CIC and, except in limited circumstances,
requires the acquisition of more than 30% of the Company's outstanding shares of
common stock) and a termination of the employment of the named executive officer
(
i.e.
, a
double trigger) as opposed to change in control arrangements that provide for
payment solely upon the consummation of a change in control (
i.e.
, a single trigger). We
believe our approach is more reasonable and reflective of our intent to
compensate the executive only in the event that the named executive’s employment
is also terminated.
For a more detailed discussion of the terms and conditions of the CICs,
see the discussion in this section under the subheading "Potential Payments Upon
Termination or Change in Control."
Deferred Compensation Plan
. We
maintain an executive officers' deferred compensation plan which permits each
named executive officer and others to defer all or part of his or her base
salary, annual incentive bonuses, and commissions under the plan on a
tax-deferred basis. We do not make contributions to the plan or pay or guarantee
earnings to participants.
An amount equal to participant deferrals is placed in a "rabbi" trust
that is subject to the claims of our creditors. Plan participants have a number
of investment options, including Bancorp stock. The return on contributions
enjoyed by each participant depends on the return on the investments which the
participant selects. Participants are fully vested in their plan benefits at all
times. For more detailed discussion of the deferred compensation plan, see the
discussion below under the subheading "Nonqualified Deferred Compensation for
2012."
Employment Contract with the CEO
.
We entered into an employment agreement with Mr. Sznewajs that became effective
on January 1, 2011 (the "2011 Employment Agreement") and continues for a
three-year term that ends December 31, 2013. This agreement became effective
immediately following the end of the term of our previous three-year agreement
with Mr. Sznewajs, which expired on December 31, 2010. Both agreements are
consistent with the objectives of our compensation program to attract, retain,
motivate and reward highly qualified executives. For more detailed discussion of
the terms and conditions of the 2011 Employment Agreement, see the tables and
related discussion below under the subheading "Potential Payments Upon
Termination or Change in Control."
Under Mr. Sznewajs’ employment agreement, Mr. Sznewajs is entitled to
receive an annual base salary of $420,000, subject to upward adjustment only
based on reviews to occur annually and an annual cash bonus opportunity of 50%
of his annual base salary. Mr. Sznewajs’ annual base salary was increased to
$450,000 effective as of February 1, 2012. Mr. Sznewajs will not receive any
stock option or restricted stock awards during the term of his employment
agreement. Mr. Sznewajs is also entitled to participate in all pension, welfare
and insurance benefit plans or programs, and such fringe benefits as are
available to other senior executives.
Employment Agreements with Mr. Robbins and Ms.
McKeown
.
In connection with the execution of the merger agreement, Mr. Robbins and
Ms. McKeown entered into substantially similar employment agreements with
Columbia that, effective upon the completion of the merger, supersede their
respective CICs that were previously entered into with West Coast Bancorp and
West Coast Bank (as described above).
The employment agreements provide that Mr. Robbins will serve as Senior
Vice President, Oregon and Southwest Washington Group Manager, and Ms. McKeown
will serve as Senior Vice President, Oregon and Southwest Washington Commercial
Banking Manager, and each will be employed in West Coast’s corporate offices as
of immediately prior to the completion of the merger. Each of the named
executive officers will have an initial annual base salary of $216,000 and be
eligible for an annual bonus with a target opportunity of 25% of annual base
salary, with the actual annual bonus to be determined based on the attainment of
performance objectives established by Columbia’s board of directors or the
compensation committee of Columbia’s board of directors.
110
The
employment agreements provide for a grant of restricted stock to each of the
executives (3,000 shares of restricted stock for Mr. Robbins and 2,000 shares of
restricted stock for Ms. McKeown) that vests over a four year period, with 20%
vesting on the second anniversary of the completion of the merger, 30% vesting
on the third anniversary of the completion of the merger and the remaining 50%
vesting on the fourth anniversary of the completion of the merger. Each of Mr.
Robbins and Ms. McKeown were also granted a retention bonus equal to $554,365
(the amount that each would have been entitled to had their employment been
terminated under certain circumstances in connection with the completion of the
merger) that vests in two equal annual installments, subject to continued
employment (subject to accelerated vesting and payment upon certain terminations
of employment) and pays out on a termination of employment for any reason after
the second anniversary of the completion of the merger.
The employment agreements also
provide that Columbia will maintain the Supplemental Executive Retirement Plans,
or SERPs, for both Mr. Robbins and Ms. McKeown, with the benefit to never be
less than the benefit provided pursuant to the SERP in the event of a qualifying
termination of employment within 24 months of a change in control. The
employment agreement also provides that, upon a termination of employment
without “cause” or a resignation for “good reason” (as each is defined in the
employment agreement), Mr. Robbins and Ms. McKeown will each be entitled to all
earned but unpaid amounts, the accelerated vesting of the retention bonus and
all outstanding equity awards, 18 months of COBRA continuation (fully paid by
Columbia) and $5,000 in outplacement and/or tax planning services. Mr. Robbins
and Ms. McKeown will also be entitled to a “gross-up” for any excise taxes as a
result of “excess parachute payments” within the meaning of Section 280G of the
Code and will be subject to a 12 month non-solicit of employees and customers
and a 12 month non-compete following the termination of their respective
employment.
Role of Executive
Officers.
The base salaries, bonus
payments, and restricted shares granted to Mr. Giltvedt, Ms. McKeown and Mr.
Robbins were recommended to the Compensation Committee by our CEO and Executive
Vice President of Human Resources, with the compensation for Ms. Sparacio
recommended to the Compensation Committee by the CEO and approved by the
Compensation Committee. The recommendations were reviewed with the Compensation
Committee chair in advance of deliberations and action by the Compensation
Committee as a whole. Our CEO and Executive Vice President of Human Resources
were present during the Compensation Committee's deliberations and approval
process (except when decisions were made for our Executive Vice President of
Human Resources, in which case our CEO was the only member of management
present). The base salary and bonus payment granted to Mr. Sznewajs were
approved by the Compensation Committee in executive session.
Compensation Recovery
and Forfeiture Policies.
We
maintain the following provisions regarding the recovery, adjustment and
forfeiture of compensation paid or due to named executive officers:
Forfeiture of Equity
Awards
.
The 2002 Plan and the 2012 Omnibus Incentive
Plan provide that, in the event the employment of any holder of an option is
terminated for cause, stock options of such holder, whether vested or unvested,
will terminate. Termination "for cause" is defined as either conviction for
committing a felony or willful and deliberate failure to perform job duties.
Restricted stock that has not yet vested will also be forfeited upon any "for
cause" termination. These provisions serve to protect our intellectual and human
capital and help ensure that our executives act in the best interest of our
company and its stockholders.
Forfeiture and Recoupment
Benefits
. Each SERP applicable to our named
executive officers provides that the executive will forfeit any benefits upon
any termination of employment "for cause." An explanation of what constitutes
"for cause" may be found in the discussion in this section below under the
subheading "Potential Payments Upon Termination or Change in Control." Each SERP
also provides that, if the non-competition or non-solicitation provisions of the
SERP agreement are violated, any payments made after the date of breach must be
repaid and any remaining unpaid benefits will be forfeited.
Recoupment of Annual Bonuses and
Stock Gains
. The Sarbanes-Oxley Act of 2002
provides that if a company is required to restate its financials due to material
non-compliance with reporting requirements, the chief executive officer and
chief financial officer must reimburse the company for (1) any bonus or other
incentive- or equity-based compensation received during the 12 months following
the first public release of later-restated financials, and (2) any profits from
the sale of securities during those 12 months.
111
Stock Ownership Policy Guidelines.
We established the following policy and recommended guidelines regarding
minimum ownership of Bancorp stock by our named executive officers:
|
Position:
|
|
Number of Shares:
|
|
Chief Executive Officer
|
18,000
|
|
Chief Financial
Officer
|
7,700
|
|
Chief Credit Officer
|
4,500
|
|
Business Banking
Manager
|
4,500
|
|
Director of Human Resources
|
4,500
|
Named executive officers are
expected to achieve the indicated share ownership within three to five years of
becoming an executive. Shares subject to stock options, whether vested or
unvested, are considered owned for purposes of our stock ownership policy.
During 2012 all named officers were in compliance with the policy.
Accounting and Tax
Treatments.
Provisions of the Code
limit the deductibility of compensation in excess of $1 million, unless the
compensation is "performance-based compensation" or qualifies under certain
other exceptions. The Compensation Committee strives to qualify executive
compensation for deductibility to the extent consistent with the best interests
of our company, but deductibility is not the sole factor used by the
Compensation Committee in ascertaining appropriate levels or modes of
compensation.
Bank Holding Company
Peer Group.
The Consultant's 2011
report provided compensation-related information regarding the bank holding
companies listed below (the "peer group"). Data is updated as of or for the
period ending September 30, 2012. Nara Bancorp, Inc. (NARA) completed a merger
and is no longer available for comparison.
|
|
|
|
|
|
|
|
|
Tangible
|
|
|
|
|
|
|
Total
|
|
|
Equity
|
|
|
|
|
|
|
Assets
|
ROAA
|
ROAE
|
Ratio
|
|
|
|
|
|
|
MRQ
|
LTM
|
LTM
|
LTM
|
|
|
Company Name
|
Ticker
|
City
|
State
|
($000)
|
(%)
|
(%)
|
(%)
|
|
1
|
Glacier Bancorp Inc.
|
GBCI
|
Kalispell
|
MT
|
7,747,440
|
0.94
|
7.93
|
10.34
|
|
2
|
Western Alliance Bancorp
|
WAL
|
Phoenix
|
AZ
|
7,622,637
|
0.69
|
7.19
|
9.07
|
|
3
|
CVB Financial Corp.
|
CVBF
|
Ontario
|
CA
|
6,363,364
|
1.18
|
10.43
|
11.10
|
|
4
|
PacWest Bancorp
|
PACW
|
Los Angeles
|
CA
|
5,463,658
|
0.93
|
9.14
|
8.98
|
|
5
|
Westamerica Bancorp.
|
WABC
|
San Rafael
|
CA
|
4,952,193
|
1.68
|
15.39
|
8.75
|
|
6
|
Columbia Banking System Inc.
|
COLB
|
Tacoma
|
WA
|
4,906,335
|
0.99
|
6.24
|
13.20
|
|
7
|
Banner Corp.
|
BANR
|
Walla Walla
|
WA
|
4,265,564
|
1.31
|
9.98
|
13.17
|
|
8
|
Wilshire Bancorp Inc.
|
WIBC
|
Los Angeles
|
CA
|
2,750,863
|
3.20
|
28.00
|
12.31
|
|
9
|
CoBiz Financial Inc.
|
COBZ
|
Denver
|
CO
|
2,653,641
|
1.58
|
17.01
|
9.69
|
|
10
|
TriCo Bancshares
|
TCBK
|
Chico
|
CA
|
2,609,269
|
0.83
|
9.41
|
8.43
|
|
11
|
First California Financial
Grp
|
FCAL
|
Westlake Village
|
CA
|
1,990,804
|
0.64
|
5.31
|
8.53
|
|
12
|
Guaranty Bancorp
|
GBNK
|
Denver
|
CO
|
1,886,938
|
0.83
|
8.11
|
9.59
|
|
13
|
Heritage Commerce Corp
|
HTBK
|
San Jose
|
CA
|
1,693,312
|
0.76
|
5.66
|
12.33
|
|
14
|
Sierra Bancorp
|
BSRR
|
Porterville
|
CA
|
1,437,903
|
0.56
|
4.47
|
11.92
|
|
15
|
Bank of Marin Bancorp
|
BMRC
|
Novato
|
CA
|
1,434,749
|
1.16
|
11.76
|
10.27
|
|
16
|
Pacific Continental Corp.
|
PCBK
|
Eugene
|
OR
|
1,373,487
|
0.65
|
4.65
|
12.10
|
|
17
|
Pacific Mercantile Bancorp
|
PMBC
|
Costa Mesa
|
CA
|
1,097,870
|
1.75
|
19.87
|
11.24
|
|
|
Average
|
|
|
|
3,544,119
|
1.16
|
10.62
|
10.65
|
|
|
25th
Percentile
|
|
|
|
1,693,312
|
0.76
|
6.24
|
9.07
|
|
|
50th
Percentile
|
|
|
|
2,653,641
|
0.94
|
9.14
|
10.34
|
|
|
75th
Percentile
|
|
|
|
4,952,193
|
1.31
|
11.76
|
12.10
|
|
|
West Coast Bancorp
|
WCBO
|
Lake Oswego
|
OR
|
2,488,180
|
1.47
|
11.19
|
13.57
|
|
|
Percent Rank
|
|
|
|
43%
|
79%
|
72%
|
Highest
|
The Consultant's 2011 report
included information regarding base salary, bonus, value of awarded stock
options, value of restricted stock awards, and certain other compensation
derived from various sources, including the reports, of members of the peer
group. The peer group used in the Consultant's 2011 report was jointly selected
by the Compensation Committee, management and the Consultant.
112
Risk Review of Compensation Plans.
The Compensation Committee completed a review of all incentive plans
(defined broadly as cash plans, equity plans, employment agreements and
executive benefits plans) in place during fiscal year 2011. The assessment of
the incentive plans was performed by key members of the Company's human
resources team in coordination with the Consultant, and included a rigorous
review of each plan's design and operation. The assessment followed the
parameters of the FDIC's Guidance on Sound Incentive Compensation Policies
finalized in 2010 that apply to all banking organizations. The findings were
reviewed by both senior management and the Compensation Committee.
The purpose of this review was to
determine whether the risks related to the design and operation of these plans,
if present, are reasonably likely to have a material adverse effect on the
Company. The Company utilized a 27 factor evaluation list provided by the
Consultant to evaluate its incentive plans. Major categories included
compensation program administration, overall compensation structure, general
incentive plan design and payout curves, performance metrics, equity
compensation, and termination provisions. We believe that our compensation
policies and practices do not encourage excessive risk-taking and are not
reasonably likely to have a material adverse effect on the Company. Mitigating
factors which support this conclusion include but are not limited to:
-
Oversight of the executive incentive plan and
long-term incentive plan by the Compensation Committee;
-
Management oversight of key plans and programs,
including approving target level payouts, setting financial and operating
goals, and approving payouts;
-
Vesting and stock ownership requirements which
encourage a long-term perspective among participants;
-
A preference for performance measures which result
in payments only upon achievement of ultimate financial results;
and
-
Centralized administration and oversight of plans
and programs.
113
Summary Compensation
Table
.
The
following table summarizes the various elements of compensation paid to or
earned by our chief executive officer, chief financial officer and other three
most highly compensated executive officers during 2010, 2011, and 2012.
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
Pension
Value
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
and Nonqualified
|
|
|
|
|
|
|
|
|
|
Incentive
|
Deferred
|
All Other
|
|
|
Name and
Principal
|
|
|
|
Stock
|
Option
|
Plan
|
Compensation
|
Compensation
|
|
|
Position
|
Year
|
Salary
|
Bonus
|
Awards (1)
|
Awards
|
Compensation
|
Earnings (2)
|
(3)
|
Total
|
|
|
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
Robert D. Sznewajs,
|
2012
|
$
|
450,000
|
$
|
325,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
178,644
|
$
|
4,265
|
$
|
957,909
|
|
President and Chief
|
2011
|
|
420,000
|
|
105,000
|
|
-
|
|
-
|
|
-
|
|
355,614
|
|
4,200
|
|
884,814
|
|
Executive Officer
|
2010
|
|
360,000
|
|
-
|
|
503,999
|
|
-
|
|
-
|
|
6,892
|
|
-
|
|
870,891
|
|
Anders Giltvedt,
|
2012
|
$
|
235,000
|
$
|
135,000
|
$
|
16,916
|
$
|
-
|
$
|
-
|
$
|
52,819
|
$
|
7,793
|
$
|
447,528
|
|
EVP/Chief Financial
|
2011
|
|
206,000
|
|
121,800
|
|
20,594
|
|
-
|
|
-
|
|
43,248
|
|
2,060
|
|
393,702
|
|
Officer
|
2010
|
|
200,000
|
|
-
|
|
132,216
|
|
-
|
|
-
|
|
40,736
|
|
-
|
|
372,952
|
|
Xandra McKeown,
|
2012
|
$
|
216,000
|
$
|
125,000
|
$
|
15,545
|
$
|
-
|
$
|
-
|
$
|
51,218
|
$
|
6,515
|
$
|
414,278
|
|
EVP/Business
|
2011
|
|
206,000
|
|
101,500
|
|
20,594
|
|
-
|
|
-
|
|
46,959
|
|
2,060
|
|
377,113
|
|
Banking
|
2010
|
|
200,000
|
|
-
|
|
100,000
|
|
-
|
|
-
|
|
44,230
|
|
-
|
|
344,230
|
|
Hadley S. Robbins,
|
2012
|
$
|
216,000
|
$
|
125,000
|
$
|
15,545
|
$
|
-
|
$
|
-
|
$
|
63,044
|
$
|
7,740
|
$
|
427,329
|
|
EVP/Chief Credit
|
2011
|
|
206,000
|
|
101,500
|
|
20,594
|
|
-
|
|
-
|
|
57,945
|
|
2,060
|
|
388,099
|
|
Officer
|
2010
|
|
200,000
|
|
-
|
|
100,000
|
|
-
|
|
-
|
|
54,578
|
|
-
|
|
354,578
|
|
Cynthia Sparacio,
|
2012
|
$
|
200,000
|
$
|
63,060
|
$
|
12,002
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
6,706
|
$
|
281,768
|
|
EVP/Human
|
2011
|
|
165,000
|
|
45,810
|
|
16,502
|
|
-
|
|
-
|
|
-
|
|
1,600
|
|
228,912
|
|
resources
|
2010
|
|
140,400
|
|
-
|
|
60,000
|
|
-
|
|
-
|
|
-
|
|
-
|
|
200,400
|
|
|
(1)
|
|
The dollar amounts in column (e) reflect the grant date
fair value using the closing price of the stock on the grant date.
Additional details regarding restricted stock awards under the 2012 Plan
are described in the tables below under the headings "Grants of Plan-Based
Awards for 2012" and "Outstanding Equity Awards at Fiscal Year-End
2012."
|
|
|
|
|
(2)
|
|
The dollar amounts in column (h) reflect increases in the
actuarial present value of each executive's SERP using assumptions
consistent with those used in our financial statements, as discussed in
the table and related discussion under the subheading "Pension Benefits
for 2012" below.
|
|
|
|
|
(3)
|
|
The dollar amounts in column (i) reflect 401 (k) Plan
matching contributions, dividends on restricted stock paid for 2012 and a
nonelective employer contribution to the 401 (k) Plan in 2011 equal to 1%
of base salary.
|
114
Grants of Plan-Based Awards for
2012.
The
following table sets forth certain information concerning individual grants of
equity and non-equity awards to the named executive officers during the year
ended December 31, 2012. No previously issued stock options were repriced or
otherwise modified in 2012.
|
|
|
|
|
All Other
|
All Other
|
All Other
|
|
|
|
|
|
|
Stock
|
Option
|
Stock
|
|
|
|
|
|
|
Awards:
|
Awards:
|
Awards:
|
|
|
|
|
|
|
Number of
|
Number of
|
Number of
|
|
|
|
|
Estimated Future Payouts
Under
|
Estimated Future Payouts
Under
|
Shares of
|
Securities
|
Shares of
|
|
|
|
|
Non-Equity Incentive Plan
Awards
|
Equity Incentive Plan
Awards
|
Stock or
|
Underlying
|
Stock or
|
|
|
Name
|
Grant
Date
|
Threshold
|
Target
|
Maximum
|
Threshold
|
Target
|
Maximum
|
Units (1)
|
Options
|
Units
|
Total (2)
|
|
|
|
($)
|
($)
|
($)
|
(#)
|
(#)
|
(#)
|
(#)
|
(#)
|
($)
|
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
(j)
|
(j)
|
|
Robert D.
|
|
|
|
|
|
|
|
|
|
|
|
|
Sznewajs
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
-
|
|
Anders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Giltvedt
|
5/29/2012
|
-
|
-
|
-
|
-
|
-
|
-
|
888
|
-
|
-
|
$
|
16,916
|
|
Xandra
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McKeown
|
5/29/2012
|
-
|
-
|
-
|
-
|
-
|
-
|
816
|
-
|
-
|
$
|
15,545
|
|
Hadley S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robbins
|
5/29/2012
|
-
|
-
|
-
|
-
|
-
|
-
|
816
|
-
|
-
|
$
|
15,545
|
|
Cynthia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sparacio
|
5/29/2012
|
-
|
-
|
-
|
-
|
-
|
-
|
630
|
-
|
-
|
$
|
12,002
|
|
|
(1)
|
|
Reflects restricted stock grants in 2012 under the 2012
Plan. Shares vest 25% per year over a four-year vesting schedule for
Anders Giltvedt, Xandra McKeown, and Hadley S. Robbins and 33-1/3% per
year over a three year vesting schedule due to retirement provisions for
Cynthia Sparacio, and vest immediately in the event of retirement, death,
disability, or termination of employment within 24 months of a change in
control affecting our company. Shares held by employees terminated for
cause terminate immediately.
|
|
|
|
|
(2)
|
|
Reflects a grant date price of
$19.05.
|
115
Outstanding Equity Awards at Fiscal
Year-End 2012
The
following table sets forth certain information concerning outstanding equity
awards held by named executive officers at December 31, 2012.
|
|
Option Awards
|
Stock
Awards
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
Equity
|
Incentive
Plan
|
|
|
|
|
Equity
|
|
|
|
|
|
Incentive Plan
|
Awards:
|
|
|
|
|
Incentive Plan
|
|
|
|
|
|
Awards:
|
Market or
|
|
|
|
|
Awards:
|
|
|
|
|
|
Number of
|
Payout
Value
|
|
|
Number of
|
Number of
|
Number of
|
|
|
|
Number of
|
Market Value
|
Unearned
|
of
Unearned
|
|
|
Securities
|
Securities
|
Securities
|
|
|
|
Shares or
|
of Shares or
|
Shares, Units
|
Shares,
Units
|
|
|
Underlying
|
Underlying
|
Underlying
|
|
|
|
Units of
|
Units of
|
or Other
|
or Other
|
|
|
Unexercised
|
Unexercised
|
Unexercised
|
|
Option
|
Stock That
|
Stock That
|
Rights That
|
Rights
That
|
|
|
Options
|
Options
|
Unearned
|
Option
|
Expiration
|
Have Not
|
Have Not
|
Have Not
|
Have Not
|
|
Name
|
Excercisable
|
Unexcercisable
|
Options
|
Exercise Price
|
Date (1)
|
Vested (2)
|
Vested (3)
|
Vested
|
Vested
|
|
|
(#)
|
(#)
|
(#)
|
($)
|
|
(#)
|
($)
|
(#)
|
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
|
1,015
|
-
|
-
|
$
|
81.20
|
4/22/2013
|
10,306
|
$
|
228,278
|
-
|
$
|
-
|
|
Robert D.
|
5,819
|
-
|
-
|
|
103.20
|
4/26/2015
|
|
|
|
|
|
|
|
Sznewajs
|
4,229
|
-
|
-
|
|
137.50
|
4/25/2016
|
|
|
|
|
|
|
|
|
6,929
|
-
|
-
|
|
63.75
|
4/22/2018
|
|
|
|
|
|
|
|
|
5,990
|
-
|
-
|
|
11.55
|
4/28/2019
|
|
|
|
|
|
|
|
|
2,019
|
-
|
-
|
$
|
81.20
|
4/22/2013
|
5,864
|
$
|
129,888
|
-
|
$
|
-
|
|
|
1,759
|
-
|
-
|
|
106.60
|
4/20/2014
|
|
|
|
|
|
|
|
Anders
|
1,800
|
-
|
-
|
|
103.20
|
4/26/2015
|
|
|
|
|
|
|
|
Giltvedt
|
700
|
-
|
-
|
|
137.50
|
4/25/2016
|
|
|
|
|
|
|
|
|
1,870
|
-
|
-
|
|
63.75
|
4/22/2018
|
|
|
|
|
|
|
|
|
1,630
|
-
|
-
|
|
11.55
|
4/28/2019
|
|
|
|
|
|
|
|
|
900
|
-
|
-
|
$
|
81.20
|
4/22/2013
|
4,804
|
$
|
106,409
|
-
|
$
|
-
|
|
|
890
|
-
|
-
|
|
106.60
|
4/20/2014
|
|
|
|
|
|
|
|
Xandra
|
999
|
-
|
-
|
|
103.20
|
4/26/2015
|
|
|
|
|
|
|
|
McKeown
|
580
|
-
|
-
|
|
137.50
|
4/25/2016
|
|
|
|
|
|
|
|
|
1,000
|
-
|
-
|
|
63.75
|
4/22/2018
|
|
|
|
|
|
|
|
|
1,380
|
-
|
-
|
|
11.55
|
4/28/2019
|
|
|
|
|
|
|
|
|
1,680
|
-
|
-
|
$
|
159.60
|
3/27/2017
|
4,804
|
$
|
106,409
|
-
|
$
|
-
|
|
Hadley S.
|
1,000
|
-
|
-
|
|
63.75
|
4/22/2018
|
|
|
|
|
|
|
|
Robbins
|
1,380
|
-
|
-
|
|
11.55
|
4/28/2019
|
|
|
|
|
|
|
|
|
800
|
-
|
-
|
$
|
81.20
|
4/22/2013
|
3,126
|
$
|
69,241
|
-
|
$
|
-
|
|
|
720
|
-
|
-
|
|
106.60
|
4/20/2014
|
|
|
|
|
|
|
|
Cynthia
|
719
|
-
|
-
|
|
103.20
|
4/26/2015
|
|
|
|
|
|
|
|
Sparacio
|
310
|
-
|
-
|
|
137.50
|
4/25/2016
|
|
|
|
|
|
|
|
|
510
|
-
|
-
|
|
63.75
|
4/22/2018
|
|
|
|
|
|
|
|
|
1,130
|
-
|
-
|
|
11.55
|
4/28/2019
|
|
|
|
|
|
|
|
|
(1)
|
|
All stock options expire 10 years
after the grant date.
|
116
|
|
(2)
|
|
Unvested awards of restricted
stock vest as follows:
|
Year of Vesting
|
Name
|
2013
|
2014
|
2015
|
2016
|
|
Robert D. Sznewajs
|
10,306
|
-
|
-
|
-
|
|
Anders Giltvedt
|
2,557
|
2,556
|
529
|
222
|
|
Xandra McKeown
|
2,045
|
2,044
|
511
|
204
|
|
Hadley S. Robbins
|
2,045
|
2,044
|
511
|
204
|
|
Cynthia Sparacio
|
1,458
|
1,458
|
210
|
-
|
|
|
(3)
|
|
Based on the $22.15 closing price
per share of our stock on December 31, 2012.
|
Option Exercises and Stock Vesting
for 2012
The
following table sets forth certain information concerning exercises of stock
options and vesting of restricted stock by the named executive officers during
the year ended December 31, 2012.
|
|
Option Awards
|
Stock Awards
|
|
|
Number of
|
|
Number of
|
|
|
|
Shares
|
Value
|
Shares
|
Value
|
|
|
Acquired on
|
Realized on
|
Acquired on
|
Realized on
|
|
Name
|
Exercise
|
Exercise
|
Vesting
|
Vesting (1)
|
|
|
(#)
|
($)
|
(#)
|
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
|
Robert D. Sznewajs
|
-
|
$
|
-
|
10,907
|
$
|
219,638
|
|
Anders Giltvedt
|
-
|
|
-
|
2,670
|
|
53,334
|
|
Xandra McKeown
|
-
|
|
-
|
2,071
|
|
41,288
|
|
Hadley S. Robbins
|
-
|
|
-
|
2,071
|
|
41,288
|
|
Cynthia Sparacio
|
-
|
|
-
|
1,460
|
|
28,954
|
|
|
(1)
|
|
Based on the closing price per share of our stock on the
date of vesting.
|
117
Pension Benefits for 2012
The following table sets forth
certain information concerning Bancorp's supplemental executive retirement
agreements ("SERPs") with named executive officers as of December 31, 2012.
|
|
|
Number of
|
|
|
|
|
|
Years
|
Present Value of
|
Payments
|
|
|
|
Credited
|
Accumulated
|
During Last
|
|
Name
|
Plan Name
|
Service (1)
|
Benefit (2)
|
Fiscal Year
|
|
|
|
(#)
|
($)
|
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
|
|
SERP for Robert
|
|
|
|
|
|
Robert D. Sznewajs
|
Sznewajs
|
11
|
1,816,214
|
$
|
-
|
|
|
SERP for Anders
|
|
|
|
|
|
Anders Giltvedt
|
Giltvedt
|
11
|
343,206
|
|
-
|
|
|
SERP for Xandra
|
|
|
|
|
|
Xandra McKeown
|
McKeown
|
11
|
379,602
|
|
-
|
|
|
SERP for Hadley
|
|
|
|
|
|
Hadley S. Robbins
|
Robbins
|
5
|
318,604
|
|
-
|
|
|
(1)
|
|
Messrs. Sznewajs and Giltvedt and
Ms. McKeown are fully vested with respect to voluntary termination
benefits under their SERPs.
|
|
|
|
|
|
|
|
(2)
|
|
SERPs are individual contracts
with each of our named executive officers that originally provided for
specified benefit payments over a fixed 15-year term. The valuation method
used to determine the present value of accumulated benefit in column (d)
above and the increase in the present value of the benefit disclosed in
column (h) of the Summary Compensation Table is consistent with Accounting
Principles Board Opinion No. 12, as amended, and based on the actual terms
of each SERP and a discount rate of 6% as specified in the SERPs. The same
methods and assumptions were used to derive amounts included in our
financial statements.
|
We
entered into a SERP with Mr. Robbins in April 2007. We entered into SERPs with
each of the other listed named executive officers other than Ms. Sparacio in
August 2003, which SERPs were amended effective July 1, 2005. Ms. Sparacio does
not have a SERP with the Company. All SERPs were amended in 2009 to comply with
section 409A of the Internal Revenue Code and to give each named executive
officer a one-time opportunity, to be exercised on or before December 31, 2008,
to elect to receive some or all SERP payments in a lump sum payment upon
reaching retirement or normal retirement age, as the case may be. Mr. Giltvedt
elected to receive a lump sum payment in the event of his death prior to normal
retirement age. The other executive officers each elected to receive lump sum
payments in all payment circumstances. Mr. Sznewajs’ SERP was restated effective
January 2011. Each SERP is a non-qualified, unfunded plan that is designed to
provide retirement benefits for the participant. Each SERP is further intended
to assist in assuring each participant's continued service to our
company.
Benefit amounts payable under each
SERP vary based on whether (1) a participant retired at normal retirement age or
terminated employment in connection with a termination event under his or her
CIC, or (2) terminated employment due to early voluntary termination, early
involuntary termination, or disability.
118
All SERP benefits are equal to, or the
lump sum payment is calculated based on the value of, a 15-year stream of
monthly payments equal to 35% of the participant's final base salary, except
that, in the event a participant terminates employment in connection with a
termination event under his or her CIC, monthly payments or lump sum amounts are
based on 35% of base salary as of the participant's normal retirement date.
Effective January 1, 2011, Mr. Sznewajs' benefit was increased to 45% of his
annual base salary as part of the negotiation of his new employment agreement.
In the event a participant terminates employment as a result of an early
voluntary termination, early involuntary termination, or disability, his or her
monthly payments or lump sum amounts will be based on annual benefit levels
determined in accordance with a formula set forth in each participant's SERP
that results in benefit amounts that increase over the participant's period of
continued service, but not above the normal retirement benefit. No benefits are
payable if a participant is terminated for cause (as defined in each
participant's CIC).
Each SERP also includes non-competition
and non-solicitation provisions that provide for a loss of future benefits and
forfeiture of benefits received after a breach but before discovery if an
executive competes with us in the states of Oregon or Washington or solicits our
customers or employees (i) in the case of Mr. Sznewajs, within 36 months of any
termination which triggers change in control benefits or 24 months of any other
termination; and (ii) in the case of other named executives, within 24 months of
any termination which triggers change in control benefits or 12 months of any
other termination.
Retirement, change in control,
involuntary termination, and disability benefits of each participant are fully
vested immediately. Voluntary termination benefits are presently vested as
follows: Mr. Sznewajs, 100%; Mr. Giltvedt, 100%; Ms. McKeown, 100%; and Mr.
Robbins, 40%. Mr. Robbins' voluntary termination benefits will continue to vest
at a rate of 10% for each additional year of completed service. Each SERP may be
amended only by mutual agreement, except that we may amend or terminate each
SERP if laws or regulations change in a way that would result in benefits being
taxable to the executive before receipt or in material financial penalties or
other materially detrimental ramifications to our company, provided in any case
vested benefits would be preserved.
Nonqualified Deferred Compensation
for 2012
The following table sets forth certain
information regarding the accounts of named executive officers under Bancorp's
executives' deferred compensation plan.
|
|
Executive
|
Bancorp
|
Aggregate
|
Aggregate
|
Aggregate
|
|
|
Contributions in
|
Contributions in
|
Earnings in Last
|
Withdrawals/
|
Balance at Last
|
|
Name
|
Last FY
|
Last FY
|
FY (1)
|
Distributions
|
FYE
|
|
|
($)
|
($)
|
($)
|
($)
|
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(e)
|
|
Robert D. Sznewajs
|
$
|
-
|
$
|
-
|
|
$
|
-
|
$
|
-
|
|
Anders Giltvedt
|
|
-
|
|
-
|
25,672
|
|
-
|
|
211,220
|
|
Xandra McKeown
|
|
-
|
|
|
1,303
|
|
-
|
|
13,451
|
|
Hadley S. Robbins
|
|
-
|
|
-
|
-
|
|
-
|
|
-
|
|
Cynthia Sparacio
|
|
37,781
|
|
-
|
22,658
|
|
-
|
|
160,726
|
|
|
(1)
|
|
No earnings in the current year
are reported as compensation in the year's Summary Compensation
Table.
|
Our executive officers' deferred
compensation plan permits each named executive officer (and other senior
executives) to defer all or part of his or her base salary, annual incentive
bonuses, and commissions on a tax-deferred basis. We have not and do not make
contributions to the plan or pay preferential earnings or guaranty interest to
participants in the plan.
Under the plan, an amount equal to
deferrals under the plan is placed in a "rabbi" trust that is subject to the
claims of our creditors. Participants have a number of investment options upon
which to base earnings on deferred amounts, including our stock. The return on
contributions enjoyed by each participant depends on the return on the
investments that the participant selects.
119
The following table shows currently
available investment choices and annualized returns earned by those choices in
2012:
|
|
Performance
|
|
Plan Investment
Choice
|
(annual return for
2012)
|
|
American Century Strategic Allocation:
Conservative
|
9.3%
|
|
American Century Strategic Allocation:
Moderate
|
12.6%
|
|
American Funds EuroPacific Growth Fund
R4
|
19.2%
|
|
American Funds Growth Fund of America
R4
|
20.6%
|
|
Baron Growth Fund
|
16.4%
|
|
Dodge & Cox Balanced Fund
|
17.8%
|
|
Federated Government Obligations
Fund
|
0.0%
|
|
Federated High-Income Bond Fund, Inc. A
|
14.3%
|
|
Federated Total Return Bond
Instl
|
6.6%
|
|
Manager's AMG Systematic Value
Fund
|
17.6%
|
|
Munder Veracity Small Cap Value
Y
|
14.0%
|
|
West Coast Bancorp Stock
|
42.6%
|
Potential Payments Upon Termination
or Change in Control
The
following five tables set forth certain information concerning payments and
other benefits that would have been payable to our named executive officers in
the event of a termination of employment on December 31, 2012, under various
circumstances described in the tables. The tables assume no changes in benefits
or vesting are made by our Board. We have not entered into any agreements or
plans that provide benefits to our named executive officers solely as a result
of a change in control. All change of control benefits require both a qualifying
termination event and a change of control event to occur. Except as noted in the
footnotes to the tables, all amounts are payable by Bancorp.
120
Robert D. Sznewajs, President and
Chief Executive Officer
|
|
|
Involuntary Terminations (Other Than Death
|
|
|
|
|
Voluntary Terminations
|
and Disability)
|
Death
|
Disability
|
|
|
For Good
|
For Good
|
Any Other
|
Without
|
Without
|
Any Other
|
|
|
|
|
Reason
|
Reason
With
|
Voluntary
|
Cause and
|
Cause and
|
Involuntary
|
|
|
|
|
Without CIC
|
CIC
|
Termination
|
Without CIC
|
With CIC
|
Terminations
|
|
|
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
Cash Severance (1)
|
$
|
883,750
|
$
|
2,006,250
|
$
|
-
|
$
|
883,750
|
$
|
2,006,250
|
$
|
-
|
$
|
-
|
$
|
-
|
Restricted Stock
Vesting (2)
|
|
228,278
|
|
228,278
|
|
228,278
|
|
228,278
|
|
228,278
|
|
-
|
|
228,278
|
|
228,278
|
|
SERP Benefits (3)
|
|
-
|
|
59,493
|
|
-
|
|
-
|
|
59,493
|
|
-
|
|
61,256
|
|
-
|
|
Health Benefits (4)
|
|
6,515
|
|
9,772
|
|
-
|
|
6,515
|
|
9,772
|
|
-
|
|
-
|
|
-
|
Life Insurance
Proceeds (5)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
300,000
|
|
-
|
|
Outplacement (6)
|
|
-
|
|
10,000
|
|
-
|
|
-
|
|
10,000
|
|
-
|
|
-
|
|
-
|
|
Tax Gross-up (7)
|
|
-
|
|
897,183
|
|
-
|
|
-
|
|
897,183
|
|
-
|
|
-
|
|
-
|
|
Total
|
$
|
1,118,543
|
$
|
3,210,976
|
$
|
228,278
|
$
|
1,118,543
|
$
|
3,210,976
|
$
|
-
|
$
|
589,534
|
$
|
228,278
|
|
|
(1)
|
|
Dollar amounts in columns (a) and
(d) are comprised of amounts that would be due to Mr. Sznewajs under his
Employment Agreement as in effect on December 31, 2012, under which, in
the event he terminates his employment with us for "good reason" or we
terminate his employment without "cause," each as described in his
employment agreement and summarized in the discussion that follows these
tables, he is entitled to receive a lump sum payment equal to the sum
of:
|
|
|
|
|
|
|
|
|
|
-
The product of his base salary in effect on
the date of termination multiplied by the number of days from the date
of termination through December 31, 2013, divided by
365;
-
Annualized bonus earned through the date
termination occurs (in this case $325,000 for 2012);
-
The product of the average of the bonus paid
for the year before the year in which termination occurs and the
annualized bonus multiplied by the number of days from January 1 of the
year following the year in which termination occurred, through December
31, 2013, divided by 365; and
-
His deemed matching and profit sharing
contributions under our 401(k) plan.
|
|
|
|
|
|
|
|
|
|
All payments must be made within
six months of termination. Mr. Sznewajs has no obligation to mitigate or
offset amounts we pay him if he takes another position following
termination.
|
|
|
|
|
|
|
|
|
|
Dollar amounts in columns (b) and
(e) represent amounts that would be due to Mr. Sznewajs under his CIC
agreement, under which, if he terminates his employment for "good reason,"
or if we or our successor terminate his employment other than for "cause,"
"disability," or death within three years of a change in control (or prior
to a change of control but on or after the date a transaction is announced
or should have been announced under applicable law), he is entitled to a
lump sum payment equal to the sum of:
|
|
|
|
|
|
|
|
|
|
-
Three times his adjusted salary and average
bonus; and
-
Three times his
deemed matching contribution under our 401(k) plan.
|
|
|
|
|
|
|
|
|
|
Cash payments due under Mr.
Sznewajs' CIC agreement must be paid the first day of the seventh month
following the date of a termination event, unless applicable regulations
permit earlier payments, in which case payment must be made within 30 days
of the date of termination.
|
121
|
|
(2)
|
|
All dollar amounts represent the
value of the vesting in full of shares of restricted stock that were not
vested as of December 31, 2012, calculated by multiplying the number of
shares that would vest by the closing price of our stock on December 31,
2012, $22.15 per share (the "Year-End Price"). Mr. Sznewajs is entitled to
vesting of all restricted stock and options with respect to various
termination events described in the column headings as follows: (i)
columns (a) and (d), under the terms of his employment agreement, (ii)
columns (b) and (e), under the terms of his CIC agreement and the 2002
Plan, (iii) columns (c) and (f), under the terms of the 2002 Plan and
related award agreements that provide for full vesting upon retirement,
unless terminated for cause, and (iv) columns (g) and (h), under the terms
of both the 2002 Plan and his employment agreement.
|
|
|
|
|
|
(3)
|
|
Represents the incremental value
of benefits that would become due to Mr. Sznewajs under his SERP upon
certain termination events described in the table.
|
|
|
|
|
|
(4)
|
|
Dollar amounts in columns (a) and
(d) represent total COBRA payments for 12 months that we would be
obligated to pay under Mr. Sznewajs' employment agreement, provided that
our obligation to make these payments terminates if he qualifies for group
health coverage from a subsequent employer. Dollar amounts in columns (b)
and (e) represent total COBRA payments for 18 months that we would be
obligated to pay under Mr. Sznewajs' CIC agreement, except that our
obligation to make these payments will not exceed the maximum period for
which COBRA coverage is provided by law.
|
|
|
|
|
|
(5)
|
|
The dollar amount in column (g)
represents amounts that would be due to Mr. Sznewajs' heirs under our
bank-owned life insurance program ($300,000) that provides a benefit to
certain executives.
|
|
|
|
|
|
(6)
|
|
Represents amounts available for
outplacement services under his CIC agreement.
|
|
|
|
|
|
(7)
|
|
If severance benefits due to Mr.
Sznewajs under his CIC agreement subject him to the federal excise tax
imposed on benefits that constitute excess parachute payments under the
Internal Revenue Code (the "Code"), he is entitled to be reimbursed for
taxes on an after-tax basis.
|
122
Anders Giltvedt, Executive Vice
President and Chief Financial Officer
|
|
|
Involuntary Terminations (Other Than Death
|
|
|
|
|
Voluntary
Terminations
|
and Disability)
|
Death
|
Disability
|
|
|
For Good
|
For Good
|
Any Other
|
Without
|
Without
|
Any Other
|
|
|
|
|
Reason
|
Reason With
|
Voluntary
|
Cause and
|
Cause and
|
Involuntary
|
|
|
|
|
Without CIC
|
CIC
|
Termination
|
Without CIC
|
With CIC
|
Terminations
|
|
|
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
Cash Severance (1)
|
$
|
-
|
$
|
621,800
|
$
|
-
|
$
|
-
|
$
|
621,800
|
$
|
-
|
$
|
-
|
$
|
-
|
Restricted Stock
Vesting (2)
|
|
-
|
|
129,888
|
|
-
|
|
-
|
|
129,888
|
|
-
|
|
129,888
|
|
129,888
|
|
SERP Benefits (3)
|
|
-
|
|
162,538
|
|
-
|
|
-
|
|
162,538
|
|
-
|
|
539,092
|
|
-
|
|
Health Benefits (4)
|
|
-
|
|
27,257
|
|
|
|
|
|
27,257
|
|
-
|
|
-
|
|
-
|
Life Insurance
Proceeds (5)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
200,000
|
|
-
|
|
Outplacement (6)
|
|
-
|
|
5
,000
|
|
-
|
|
-
|
|
5
,000
|
|
-
|
|
-
|
|
-
|
|
Tax Gross-up (7)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Total
|
$
|
-
|
$
|
946,483
|
$
|
-
|
$
|
-
|
$
|
946,483
|
$
|
-
|
$
|
868,980
|
$
|
129,888
|
|
|
(1)
|
|
Dollar amounts in columns (b) and (e)
represent amounts that would be due to Mr. Giltvedt under his CIC
agreement, under which, if he
terminates his employment for "good reason," or if we or our successor
terminate his employment other than for "cause," "disability," or death
within two years of a change in control (or prior to a change of control
but on or after the date a transaction is announced or should have been
announced under applicable law), he is entitled to a lump sum payment
equal to the sum of:
|
|
|
|
|
-
Two times his adjusted salary
and average bonus; and
-
Two times his deemed matching
contribution under our 401(k) plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of calculating Mr. Giltvedt's
severance payment under his CIC agreement, we have used the average of
bonuses paid to him in 2012 and 2013 for services to our company in 2011
and 2012. Cash payments due under Mr. Giltvedt's CIC agreement must be
paid within 30 days of the date of a termination event.
|
|
|
|
|
|
|
|
(2)
|
|
All dollar amounts represent the value of
the vesting in full of restricted stock that was not vested as of December
31, 2012, calculated by multiplying the number of shares that would vest
by the Year-End Price. Mr. Giltvedt is entitled to vesting of all
restricted stock and options, (i) with respect to termination events
described in columns (b) and (e), under the terms of his CIC agreement and
the 2002 and 2012 Plan and (ii) with respect to termination events
described in columns (g) and (h), under the terms of the 2002 and 2012
Plan.
|
|
|
|
|
|
|
|
(3)
|
|
Represents the incremental value of benefits
that would become due to Mr. Giltvedt under his SERP upon certain
termination events described in the table.
|
|
|
|
|
|
|
|
(4)
|
|
Dollar amounts in columns (b) and (e)
represent total COBRA payments for 18 months that would be due to Mr.
Giltvedt under his CIC agreement, except that our obligation to make these
payments will end at the maximum period for which COBRA coverage is
provided by law.
|
|
|
|
|
|
|
|
(5)
|
|
The dollar amount in column (g) represents
amounts due to Mr. Giltvedt's heirs under our bank-owned life insurance
program ($200,000) that provides a benefit to certain
executives.
|
|
|
|
|
|
|
|
|
(6)
|
|
Represents the amount available to cover
outplacement services under his CIC agreement.
|
|
|
|
|
|
|
|
|
(7)
|
|
If severance benefits due to Mr. Giltvedt
under his CIC agreement subject him to the federal excise tax imposed on
benefits that constitute excess parachute payments under the Code, he is
also entitled to be reimbursed for taxes on an after-tax basis. Mr.
Giltvedt's severance benefits as of December 31, 2012, would not trigger
an excise tax under the Code, so no gross-up payment is shown in this
illustration.
|
123
Xandra McKeown, Executive Vice
President of Commercial Banking.
|
|
|
Involuntary Terminations (Other Than Death
|
|
|
|
|
Voluntary
Terminations
|
and Disability)
|
Death
|
Disability
|
|
|
For Good
|
For Good
|
Any Other
|
Without
|
Without
|
Any Other
|
|
|
|
|
Reason
|
Reason With
|
Voluntary
|
Cause and
|
Cause and
|
Involuntary
|
|
|
|
|
Without CIC
|
CIC
|
Termination
|
Without CIC
|
With CIC
|
Terminations
|
|
|
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
Cash Severance (1)
|
$
|
554,365
|
$
|
554,365
|
$
|
-
|
$
|
554,365
|
$
|
554,365
|
$
|
-
|
$
|
554,365
|
$
|
554,365
|
Restricted Stock
Vesting (2)
|
|
106,409
|
|
106,409
|
|
-
|
|
106,409
|
|
106,409
|
|
-
|
|
106,409
|
|
106,409
|
|
SERP Benefits (3)
|
|
88,360
|
|
162,538
|
|
-
|
|
88,360
|
|
88,360
|
|
-
|
|
478,715
|
|
88,360
|
|
Health Benefits (4)
|
|
9,772
|
|
9,772
|
|
|
|
9,772
|
|
9,772
|
|
-
|
|
9,772
|
|
9,772
|
Life Insurance
Proceeds (5)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
200,000
|
|
-
|
|
Outplacement (6)
|
|
5
,000
|
|
5
,000
|
|
-
|
|
5
,000
|
|
5
,000
|
|
-
|
|
-
|
|
5 ,000
|
|
Tax Gross-up (7)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Total
|
$
|
763,906
|
$
|
763,906
|
$
|
-
|
$
|
763,906
|
$
|
763,906
|
$
|
-
|
$
|
1,349,261
|
$
|
763,906
|
|
|
(1)
|
|
The employment
agreement entered into by Columbia with Ms. McKeown will become effective
upon completion of the Merger and provides for a lump sum cash retention
payment equal to $554,365. The retention bonus will vest in two equal
installments and the vested amount will be payable upon termination of
employment. The vesting of the retention bonus accelerates upon a
qualifying termination of employment as described in Part III, Item 11
“Executive Compensations” above under the subheading “Compensation
Discussion and Analysis.” The disclosures in the table assume that the
agreement with Columbia was in effect as of the termination date used for
purposes of this illustration, December 31, 2012.
|
|
|
|
|
(2)
|
|
All dollar amounts represent the
value of the vesting in full of restricted stock and stock options that
were not vested as of December 31, 2012, calculated by multiplying the
number of shares that would vest by the Year-End Price. Ms. McKeown is
entitled to vesting of all restricted stock and options, (i) with respect
to termination events described in columns (a) and (d), under the terms of
her employment agreement with Columbia, (ii) with respect to termination
events described in columns (b) and (e), under the terms of her employment
agreement and the 2002 and 2012 Plan and (iii) with respect to termination
events described in columns (g) and (h), under the terms of the 2002 and
2012 Plan.
|
|
|
|
|
(3)
|
|
Represents the incremental value
of benefits that would become due to Ms. McKeown under her employment
agreement and modified SERP upon certain termination events described in
the table.
|
|
|
|
|
(4)
|
|
Dollar amounts
represent total COBRA payments for 18 months that would be due to Ms.
McKeown under her employment agreement, except that our obligation to make
these payments will end at the maximum period for which COBRA coverage is
provided by law.
|
|
|
|
|
(5)
|
|
The dollar amount in column (g)
represents amounts due to Ms. McKeown's heirs under our bank-owned life
insurance program ($200,000) that provides a benefit to certain
executives.
|
|
|
|
|
(6)
|
|
Represents the amount available to
cover outplacement services under her employment
agreement.
|
|
|
|
|
(7)
|
|
If severance benefits due to Ms.
McKeown under her employment agreement subject her to the federal excise
tax imposed on benefits that constitute excess parachute payments under
the Code, she is also entitled to be reimbursed for taxes on an after-tax
basis. Ms. McKeown's severance benefits as of December 31, 2012, would not
trigger an excise tax under the Code, so no gross-up payment is shown in
this illustration.
|
124
Hadley S. Robbins, Executive Vice
President and Chief Credit Officer
|
|
|
Involuntary Terminations (Other Than Death
|
|
|
|
|
Voluntary
Terminations
|
and Disability)
|
Death
|
Disability
|
|
|
For Good
|
For Good
|
Any Other
|
Without
|
Without
|
Any Other
|
|
|
|
|
Reason
|
Reason With
|
Voluntary
|
Cause and
|
Cause and
|
Involuntary
|
|
|
|
|
Without CIC
|
CIC
|
Termination
|
Without CIC
|
With CIC
|
Terminations
|
|
|
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
Cash Severance (1)
|
$
|
554,365
|
$
|
554,365
|
$
|
-
|
$
|
554,365
|
$
|
554,365
|
$
|
-
|
$
|
554,365
|
$
|
554,365
|
Restricted Stock
Vesting (2)
|
|
106,409
|
|
106,409
|
|
-
|
|
106,409
|
|
106,409
|
|
-
|
|
106,409
|
|
106,409
|
|
SERP Benefits (3)
|
|
401,982
|
|
401,982
|
|
-
|
|
401,982
|
|
401,982
|
|
-
|
|
747,106
|
|
401,982
|
|
Health Benefits (4)
|
|
1 ,056
|
|
1 ,056
|
|
|
|
1 ,056
|
|
1 ,056
|
|
-
|
|
1 ,056
|
|
1 ,056
|
Life Insurance
Proceeds (5)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
200,000
|
|
-
|
|
Outplacement (6)
|
|
5
,000
|
|
5
,000
|
|
-
|
|
5
,000
|
|
5
,000
|
|
-
|
|
-
|
|
5 ,000
|
Tax Gross-up (Est.)
(7)
|
|
-
|
|
453,110
|
|
-
|
|
-
|
|
453,110
|
|
-
|
|
-
|
|
-
|
|
Total
|
$
|
1 ,068,812
|
$
|
1,521,922
|
$
|
-
|
$
|
1,068,812
|
$
|
1,521,922
|
$
|
-
|
$
|
1,608,936
|
$
|
1,068,812
|
|
|
(1)
|
|
The employment agreement entered
into by Columbia with Mr. Robbins will become effective upon completion of
the Merger and provides for a lump sum cash retention payment equal to
$554,365. The retention bonus will vest in two equal installments and the
vested amount will be payable upon termination of employment. The vesting
of the retention bonus accelerates upon a qualifying termination of
employment as described in Part III, Item 11 “Executive Compensations”
above under the subheading “Compensation Discussion and Analysis.” The
disclosures in the table assume that the agreement with Columbia was in
effect as of the termination date used for purposes of this illustration,
December 31, 2012.
|
|
|
|
|
(2)
|
|
All dollar amounts represent the
value of the vesting in full of restricted stock that were not vested as
of December 31, 2012, calculated by multiplying the number of shares that
would vest by the Year-End Price. Mr. Robbins is entitled to vesting of
all restricted stock and options, (i) with respect to termination events
described in columns (a) and (d), under the terms of his employment
agreement with Columbia, (ii) with respect to termination events described
in columns (b) and (e), under the terms of his employment agreement and
the 2002 and 2012 Plan, and (ii) with respect to termination events
described in columns (g) and (h), under the terms of the 2002 and 2012
Plan.
|
|
|
|
|
(3)
|
|
Represents the incremental value of
benefits that would become due to Mr. Robbins under his employment
agreement and modified SERP upon certain termination events described in
the table.
|
|
|
|
|
(4)
|
|
Dollar amounts represent total
COBRA payments for 18 months that would be due to Mr. Robbins under his
employment agreement, except that our obligation to make these payments
will end at the maximum period for which COBRA coverage is provided by
law.
|
|
|
|
|
(5)
|
|
The dollar amount in column (g)
represents amounts due to Mr. Robbins's heirs under our bank-owned life
insurance program ($200,000) that provides a benefit to certain
executives.
|
|
|
|
|
(6)
|
|
Represents the amount available to
cover outplacement services under his CIC agreement.
|
|
|
|
|
(7)
|
|
If severance benefits due to Mr.
Robbins subject him to the federal excise tax imposed on benefits that
constitute excess parachute payments under the Code, he is also entitled
to be reimbursed for taxes on an after-tax basis. Amount shown represents
the estimated gross-up payment that would be due to Mr. Robbins under the
terms of his employment agreement to cover excise taxes arising out of
severance benefits shown in the table.
|
125
Cynthia Sparacio, Executive Vice
President
|
|
|
Involuntary Terminations (Other Than
Death
|
|
|
|
|
Voluntary
Terminations
|
and Disability)
|
Death
|
Disability
|
|
|
For Good
|
For Good
|
Any Other
|
Without
|
Without
|
Any Other
|
|
|
|
|
Reason
|
Reason With
|
Voluntary
|
Cause and
|
Cause and
|
Involuntary
|
|
|
|
|
Without CIC
|
CIC
|
Termination
|
Without CIC
|
With CIC
|
Terminations
|
|
|
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
Cash Severance (1)
|
$
|
-
|
$
|
481,324
|
$
|
-
|
$
|
-
|
$
|
481,324
|
$
|
-
|
$
|
-
|
$
|
-
|
Restricted Stock
Vesting (2)
|
|
-
|
|
69,241
|
|
-
|
|
-
|
|
69,241
|
|
-
|
|
69,241
|
|
69,241
|
|
Health Benefits (3)
|
|
-
|
|
9,772
|
|
|
|
-
|
|
9,772
|
|
-
|
|
-
|
|
-
|
Life Insurance
Proceeds (4)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
200,000
|
|
-
|
|
Outplacement (5)
|
|
-
|
|
5
,000
|
|
-
|
|
-
|
|
5
,000
|
|
-
|
|
-
|
|
-
|
|
Tax Gross-up (6)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Total
|
$
|
-
|
$
|
565,337
|
$
|
-
|
$
|
-
|
$
|
565,337
|
$
|
-
|
$
|
269,241
|
$
|
69,241
|
|
|
(1)
|
|
Dollar amounts in columns (b) and
(e) represent amounts that would be due to Ms. Sparacio under her CIC
agreement with us, under which, if she terminates her employment for "good
reason," or if we or our successor terminate her employment other than for
"cause," "disability," or death within two years of a change in control
(or prior to a change of control but on or after the date a transaction is
announced or should have been announced under applicable law), she is
entitled to a lump sum payment equal to the sum of:
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
All dollar amounts represent
the value of the vesting in full of restricted stock that were not vested
as of December 31, 2012, calculated by multiplying the number of shares
that would vest by the Year-End Price. Ms. Sparacio is entitled to vesting
of all restricted stock and options, (i) with respect to termination
events described in columns (b) and (e), under the terms of her CIC
agreement and the 2002 and 2012 Plan and (ii) with respect to termination
events described in columns (g) and (h), under the terms of the 2002 and
2012 Plan.
|
|
|
|
|
(3)
|
|
Dollar amounts in columns (b)
and (e) represent total COBRA payments for 18 months that would be due to
Ms. Sparacio under her employment agreement, except that our obligation to
make these payments will end at the maximum period for which COBRA
coverage is provided by law.
|
|
|
|
|
(4)
|
|
The dollar amount in column (g)
represents amounts due to Ms. Sparacio's heirs under our bank-owned life
insurance program ($200,000) that provides a benefit to certain
executives.
|
|
|
|
|
(5)
|
|
Represents the amount available to
cover outplacement services under her CIC agreement.
|
|
|
|
|
(6)
|
|
If severance benefits due to Ms.
Sparacio subject her to the federal excise tax imposed on benefits that
constitute excess parachute payments under the Code, she is also entitled
to be reimbursed for taxes on an after-tax basis. Ms. Sparacio’s severance benefits as of December 31, 2012, would
not trigger an excise tax under the Code, so no gross-up payment is shown
in this illustration.
|
126
Non-Employee Director Compensation for
2012
The following table summarizes
compensation paid to non-employee directors for services during the year ended
December 31, 2012.
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
Deferred
|
|
|
|
|
|
|
Fees Earned or
|
Stock Awards
|
Option Awards
|
Incentive Plan
|
Compensation
|
All Other
|
|
|
|
Name
|
Paid in Cash
|
(1)
|
(2)
|
Compensation
|
Earnings (3)
|
Compensation
|
Total
|
|
|
($)
|
($)
|
($)
|
($)
|
($)
|
|
($)
|
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
|
(g)
|
(h)
|
|
Lloyd D. Ankeny
|
$
|
81,100
|
$
|
20,003
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
101,103
|
|
David Dietzler
|
|
55,333
|
|
20,003
|
|
-
|
|
-
|
|
-
|
|
-
|
|
75,336
|
|
Henchy Enden
|
|
39,533
|
|
20,003
|
|
-
|
|
-
|
|
-
|
|
-
|
|
59,536
|
|
Sam Levinson
|
|
44,600
|
|
20,003
|
|
-
|
|
-
|
|
-
|
|
-
|
|
64,603
|
|
Steven J. Oliva
|
|
44,300
|
|
20,003
|
|
-
|
|
-
|
|
-
|
|
-
|
|
64,303
|
|
John T. Pietrzak
|
|
44,900
|
|
20,003
|
|
-
|
|
-
|
|
-
|
|
-
|
|
64,903
|
|
Steven N. Spence
|
|
58,700
|
|
20,003
|
|
-
|
|
-
|
|
-
|
|
-
|
|
78,703
|
|
Dr. Nancy A Wilgenbusch
|
|
58,700
|
|
20,003
|
|
-
|
|
-
|
|
-
|
|
-
|
|
78,703
|
|
|
(1)
|
|
Reflects the grant date fair
value of 1,050 shares of restricted stock granted to each director using
the closing price of the stock on the grant date, $19.05 per share. Shares
vest after one year.
|
|
|
|
|
(2)
|
|
The following table shows the
total number of stock options outstanding as of December 31, 2012, for
each non- employee director:
|
|
|
No. of Stock Options
|
|
Mr. Ankeny
|
4,090
|
|
Mr. Dietzler
|
-
|
|
Ms. Enden
|
-
|
|
Mr. Levinson
|
-
|
|
Mr. Oliva
|
4,090
|
|
Mr. Pietrzak
|
-
|
|
Mr. Spence
|
2,610
|
|
Dr. Wilgenbusch
|
4,090
|
|
|
(3)
|
|
Non-employee directors are
entitled to participate in Bancorp's Directors' Deferred Compensation Plan
(the "Directors' DCP"), under which directors may elect to defer payment
of some or all of their directors fees. Earnings on contributions by each
participant are dependent on the return on investments that the director
selects from a list of publicly available mutual funds or Bancorp stock.
See "Executive Compensation—Nonqualified Deferred Compensation for 2012"
for a list of available investment options, which are the same as those
available to our executives under the executives' plan. We do not make
additional contributions or provide above-market or preferential earnings
on fees deferred by directors under the Directors'
DCP.
|
127
In establishing
non-employee director compensation, the Compensation Committee and the Board of
Directors considered information regarding the compensation paid to directors of
the peer group companies listed under the heading "Executive
Compensation—Discussion and Analysis of Executive Compensation Programs" below
that was provided by McLagan, an Aon Hewitt company, a compensation consultant
engaged by the Compensation Committee in 2011, along with director compensation
information derived from other sources. Non-employee directors serving on the
Board are paid an annual retainer and additional fees for attendance at certain
Board and Board committee meetings.
During 2012, the Board chair received an
annual retainer of $64,000, while the Audit Committee, Compensation Committee
and Loan Committee chairs received $44,000. The Governance Committee chair, who
also serves as the Board chair, waived for 2012 the additional retainer of
$6,000
normally received by the Governance Committee chair. All other directors
received annual retainers of $32,000. Non-employee directors also received $300
for each regular board meeting attended. In addition, non-employee directors
received $600 for each Board committee meeting attended (whether as a member of
a committee or at the request of a committee) on the same day as a regular Board
meeting. Non-employee directors also received $600 for attending meetings with
the Company's independent registered public accountants to analyze, review, and
discuss the Company's quarterly earnings releases and Forms 10-Q, Form 10-K, and
related matters. Non-employee directors also received $200 per day (or partial
day) for attendance at education programs and are reimbursed for travel expenses
to attend regular board meetings and education programs. Bancorp directors who
also serve on the board of West Coast Trust received $300 for each regular
meeting of the West Coast Trust board that they attended. The West Coast Trust
board chair received an additional $1,000 for the year.
Recent practice has been to grant
restricted stock awards and/or stock options to non-employee directors on an
annual basis. In 2012, the directors were granted a restricted stock award at
the May 29, 2012, board meeting as reflected in the preceding table.
Compensation Committee Interlocks and
Insider Participation
Messrs. Ankeny, Oliva, Pietrzak and
Levinson, Ms. Enden, and Dr. Wilgenbusch served on the Compensation Committee
during 2012. During 2012, none of our executive officers served on the Board of
Directors of any entities whose directors or officers serve on our Compensation
Committee.
Compensation Committee
Report
The Compensation & Personnel
Committee ("Compensation Committee") discharges the responsibilities assigned to
it by the Board of Directors with respect to compensation and personnel matters,
including those relating to Bancorp's executive officers.
In discharging its responsibilities, the
Compensation Committee:
-
Reviewed
and discussed with management the Compensation Discussion and Analysis
included in this report; and
-
Based on the review and discussions, the
Compensation Committee recommended to the Board of Directors that the
Compensation Discussion and Analysis be included in the report and furnished
in the Company's annual report on Form 10-K for the year ended December 31,
2012, through its incorporation by reference from the
report.
Compensation Committee
Members
Dr. Wilgenbusch (Chair), Mr. Ankeny, Ms.
Enden, Mr. Levinson,
Mr. Oliva, and Mr. Pietrzak.
128
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCK HOLDER
MATTERS
|
Stock Ownership Table
The following
table shows beneficial ownership as of February 1, 2013, of Bancorp common stock
beneficially owned by our current directors and nominees for director, the
executive officers named in the summary compensation table, shareholders known
to us to beneficially own more than 5% of our common stock, and all executive
officers and directors of Bancorp as a group. No officer or director
beneficially owns any shares of Series B Preferred Stock. Beneficial ownership
includes shares currently owned, shares that a person has a right to vote or
transfer, and any shares that a person has a right to acquire within 60 days. To
our knowledge, none of the listed shares have been pledged as collateral for
loans or other indebtedness. Except as noted below, each holder has sole voting
and investment power with respect to listed shares. At February 1, 2013, Bancorp
had 19,316,843 shares outstanding.
|
|
|
Number of
Common
|
|
|
|
|
|
|
Shares
Beneficially
|
|
Percent
of
|
|
Name and
Address
|
|
|
Owned
(1)(2)(3)(4)
|
|
Common
(5)
|
|
5% or Greater Owners of Voting
Securities
|
|
|
|
|
|
|
|
MFP Partners,
L.P.
|
|
1,707,000
|
(6)
|
|
8.84
|
%
|
|
25
th
Floor, 667
Madison Avenue
|
|
|
|
|
|
|
|
New York, NY
10065
|
|
|
|
|
|
|
|
GF
Financial, LLC
|
|
1,457,000
|
(7)
|
|
7.54
|
%
|
|
1271 Avenue of the Americas
|
|
|
|
|
|
|
|
New
York, NY 10020
|
|
|
|
|
|
|
|
The Vanguard
Group
|
|
1,018,699
|
(8)
|
|
5.28
|
%
|
|
100 Vanguard
Blvd.
|
|
|
|
|
|
|
|
Malvern, PA
19355
|
|
|
|
|
|
|
|
Franklin Mutual Advisors, LLC
|
|
1,707,000
|
(9)
|
|
8.84
|
%
|
|
101
John F. Kennedy Parkway
|
|
|
|
|
|
|
|
Short Hills, NJ 07078
|
|
|
|
|
|
|
|
AQR Capital Management,
LLC
|
|
1,328,086
|
(10)
|
|
6.9
|
%
|
|
Two Greenwich Plaza,
3
rd
Floor
|
|
|
|
|
|
|
|
Greenwich, CT
06830
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Common
|
|
|
Percent of
|
|
|
|
|
Shares
Beneficially
|
|
|
Common
Shares
|
|
|
Name
|
|
|
|
|
Owned (1)(2)(3)(4)
|
|
|
Outstanding
(5)
|
|
|
Officers and Directors
|
|
|
|
|
|
|
|
Lloyd D. Ankeny
|
|
40,397
|
|
|
*
|
|
|
David A. Dietzler
|
|
1,050
|
|
|
*
|
|
|
Henchy R. Enden
|
|
1,050
|
|
|
*
|
|
|
Anders Giltvedt
|
|
31,847
|
|
|
*
|
|
|
Sam Levinson
|
|
2,248
|
|
|
*
|
|
|
Xandra McKeown
|
|
15,739
|
|
|
*
|
|
|
Steven J. Oliva
|
|
55,815
|
|
|
*
|
|
|
John T. Pietrzak
|
|
3,475
|
|
|
*
|
|
|
Hadley S.
Robbins
|
|
15,236
|
|
|
*
|
|
|
Cynthia J. Sparacio
|
|
12,097
|
|
|
*
|
|
|
Steven N. Spence
|
|
14,481
|
(11)
|
|
*
|
|
|
Robert D. Sznewajs
|
|
82,804
|
(12)
|
|
*
|
|
|
Dr. Nancy
Wilgenbusch
|
|
10,910
|
|
|
*
|
|
|
All
directors and executive officers as a group
|
|
313,624
|
|
|
1.62
|
%
|
|
(15 persons)
|
|
|
|
|
|
|
|
*Represents less than 1% of our
outstanding common stock.
|
129
|
|
(1)
|
|
Share amounts include shares
subject to stock options currently exercisable or exercisable within 60
days after January 22, 2013, as follows: Lloyd D. Ankeny, 4,090 shares;
Anders Giltvedt, 9,778 shares; Xandra McKeown, 5,749 shares; Steven J.
Oliva, 4,090 shares; Hadley Robbins, 4,060 shares; Cynthia J. Sparacio,
4,189 shares; Steven N. Spence, 2,610 shares; Robert D. Sznewajs, 23,982
shares; Dr. Nancy Wilgenbusch, 4,090 shares, and by all directors and
executive officers as a group, 67,388 shares.
|
|
|
|
|
|
(2)
|
|
Share amounts include shares held
under deferred compensation plans as to which participants have shared
voting and dispositive power as follows: Lloyd D. Ankeny, 346 shares;
Xandra McKeown, 29 shares; Steven J. Oliva, 9,125 shares; Steven N.
Spence, 276 shares; Cynthia Sparacio, 1,490 shares; and Dr. Nancy
Wilgenbusch, 543 shares.
|
|
|
|
|
|
(3)
|
|
Share amounts include restricted
shares which, although not fully vested, possess full voting rights, as
follows: Lloyd Ankeny, 1,050 shares; David A. Dietzler, 1,050 shares;
Henchy R. Enden, 1,050 shares; Anders Giltvedt, 5,864 shares; Sam
Levinson, 1,050 shares; Steven Oliva, 1,050 shares; Xandra McKeown, 4,804
shares; John T. Pietrzak, 1,050 shares; Hadley Robbins, 4,804 shares;
Cynthia J. Sparacio, 3,126 shares; Steven N. Spence, 1,050 shares; and
Robert D. Sznewajs, 10,306 shares; Dr. Nancy Wilgenbusch, 1,050 shares;
and by all directors and executive officers as a group, 42,283
shares.
|
|
|
|
|
|
(4)
|
|
Share amounts include the
following shares held in accounts under Bancorp's 401(k) Plan: Anders
Giltvedt, 1 share; Xandra McKeown, 285 shares; Robert D. Sznewajs, 298
shares; and by all directors and executive officers as a group, 10,506
shares.
|
|
|
|
|
|
(5)
|
|
Calculated in accordance with
Rule 13d-3(d)(1) of the Securities Exchange Act of 1934 (the "Exchange
Act").
|
|
|
|
|
|
(6)
|
|
Based on information contained in
the Schedule 13D jointly filed October 5, 2012, by MFP Partners, L.P
("Partners"), MFP Investors LLC, the general partner of Partners
("Investors"), and Michael Price, managing partner of Partners ("Price").
The Schedule 13D indicates Partners, Investors, and Price share voting and
dispositive power with respect to the listed shares. Partners also
beneficially owns (i) 8,782 shares of Series B Preferred Stock, which is
convertible into 87,820 shares of common stock following transfer to third
parties in a widely dispersed offering and (ii) a Class C Warrant, which
is exercisable to purchase 75,000 shares of Series B Preferred Stock,
which are convertible into 750,000 shares of common stock following
transfer to third parties in a widely dispersed offering. Since Partners
does not have the right to acquire these shares of common stock and will
not have voting or dispositive power of such shares of common stock, the
underlying shares of common stock are not included in the amount
reported.
|
|
|
|
|
|
(7)
|
|
Based on information contained in
the Schedule 13D jointly filed October 1, 2012, by GF Financial, LLC
("GFF"), Diaco Investments, L.P., 90% owner and manager member of GFF
("Diaco"), Siget, L.L.C., general partner of Diaco ("Siget"), and Simon
Glick, managing member of Siget. The Schedule 13D indicates that GFF may
be deemed to be the beneficial owner of the shares and that GFF, Diaco,
Siget and Mr. Glick may be deemed to share voting and dispositive power
with respect to the listed shares. GFF also directly owns: (i) 8,782
shares of Series B Preferred Stock, which is convertible into 87,820
shares of common stock following transfer to unaffiliated third parties in
a widely dispersed offering and (ii) Class C Warrants exercisable for
65,000 shares of Series B Preferred Stock that would be convertible into
650,000 shares of common stock following transfer to unaffiliated third
parties in a widely dispersed offering. Since GFF does not have the right
to acquire these shares of common stock and will have no voting or
dispositive power over such common stock, those underlying shares of
common stock are not included in the amount reported.
|
|
|
|
|
|
(8)
|
|
Based on information contained in
the Schedule 13G filed February 12, 2013, by The Vanguard Group, Inc. the
Schedule 13G indicates that The Vanguard Group, Inc. has sole voting power
with respect to 33,305 shares, sole dispositive power with respect to
986,894 shares, and shared dispositive power with respect to 31,805
shares. The Schedule 13G indicates that Vanguard Fiduciary Trust Company,
a wholly-owned subsidiary of the Vanguard Group, Inc., is the beneficial
owner of 31,805 shares as a result of its serving as investment manager of
collective trust accounts, and that Vanguard Investments Australia, Ltd.),
a wholly-owned subsidiary of The Vanguard Group, Inc., is the beneficial
owner of 1,500 shares as a result of its serving as investment manager of
Australian investment offerings.
|
|
|
|
|
|
(9)
|
|
Based on information contained in
the Schedule 13G/A filed February 10, 2012, by Franklin Mutual Advisers
LLC ("FMA"). The Schedule 13GA indicates that FMA has sole voting and
dispositive power with respect to the listed shares. FMA also has
beneficial ownership of: (i) 8,782 shares of Series B Preferred Stock,
which are convertible into 87,820 shares of common stock, if such shares
of Series B Preferred Stock are transferred to unaffiliated third parties
in a widely dispersed offering and (ii) Class C Warrants, which are
exercisable for 50,000 shares of Series B Preferred Stock that would be
convertible into 500,000 shares of common stock if such shares of Series B
Preferred Stock are transferred to unaffiliated third parties in a widely
dispersed offering. Since FMA does not have the right to acquire such
common stock and will have no voting or investment power over such common
stock, those underlying shares are not included in the amount
reported.
|
130
|
|
(10)
|
|
Based on information contained in
the Schedule 13G filed February 13, 2013, by AQR Capital Management LLC
(“AQR”). The Schedule 13G indicates that AQR has shared voting and
dispositive power over the listed shares. The Schedule 13G indicates that
AQR is a beneficial owner of the listed shares as a result of its serving
as an investment adviser.
|
|
|
|
|
|
(11)
|
|
Share amounts include 1,054
shares owned by Mr. Spence's spouse. Mr. Spence disclaims any beneficial
ownership of these shares.
|
|
|
|
|
|
(12)
|
|
Share amounts include 4 shares
owned by Mr. Sznewajs' spouse. Mr. Sznewajs disclaims any beneficial
ownership of these shares.
|
Equity Compensation Plan
Information
The following
table summarizes information regarding shares of Bancorp stock that may be
issued upon exercise of options, warrants and rights under Bancorp's existing
equity compensation plans and arrangements as of December 31, 2012. All of our
plans or arrangements under which equity compensation may be awarded have been
approved by shareholders. The information includes the number of shares covered
by and the weighted average exercise price of, outstanding options, warrants,
and other rights and the number of shares remaining available for future grants,
excluding the shares to be issued upon exercise of outstanding options,
warrants, and other rights.
|
|
|
|
|
C. Number of securities
|
|
|
|
|
|
remaining available for
|
|
|
A.
Number of securities to
|
|
|
future issuance under equity
|
|
|
be
issued upon exercise of
|
B. Weighted-average
|
compensation plans
|
|
|
outstanding options,
|
exercise price of outstanding
|
(excluding securities
|
|
Plan Category
|
warrantes, and rights
|
options, warrants and
rights
|
reflected in column A)
|
|
|
|
|
|
Equity compensation plans
|
|
|
|
|
|
approved by shareholders (1)
|
198,951
|
$
|
72.62
|
372,166
|
|
Equity compensation plans
|
|
|
|
|
|
not
approved by
|
|
|
|
|
shareholders (1)
|
-
|
N/A
|
-
|
|
Total
|
198,951
|
$
|
72.62
|
372,166
|
|
|
(1)
|
|
Future grants may be made only
under the 2012 Plan.
|
131
ITEM 13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Transactions with Related Persons
Many of our
directors and officers, members of their immediate families, and firms in which
they have or had an interest were customers of and had transactions with the
Bank or West Coast Trust during 2012 in the ordinary course of business. Similar
transactions may be expected to take place in the ordinary course of business in
the future. All outstanding loans and commitments were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not, in the opinion
of management, involve more than the normal risk of collectability or present
other unfavorable features.
Bancorp has adopted written policies and procedures for the review,
approval and ratification of transactions with related persons. Related persons
include our directors and named executive officers. The policies require that
all transactions with related persons that are required to be publicly disclosed
under Item 404 of Regulation S-K of the Securities and Exchange Commission
("SEC") be either approved or ratified by a designated Board committee and
reported to the Board of Directors.
The policies require that all material facts of all transactions that
require approval be reviewed and either approved or disapproved:
-
Loan Committee Approval
. With
respect to loans and other extensions of credit, by the Loan Committee, with
any members of the committee who are not independent abstaining from
discussion and voting; and
-
Governance Committee Approval.
With respect to other transactions, by
the Governance Committee.
In determining whether to approve or ratify a transaction, the
appropriate Board committee will take into account, among other factors
determined to be appropriate, whether the transaction is on terms no less
favorable than terms generally available to an unaffiliated third-person under
the same or similar circumstances and the extent of the related person's
interest in the transaction. If advance approval of a transaction is not
feasible, the transaction is considered and, if determined to be appropriate,
ratified by the committee as soon as practicable after its occurrence.
No director may participate in any discussion or approval of a
transaction for which he or she is involved, except that the director is
required to provide all material information concerning the transaction to the
committee. If a transaction will be ongoing, the appropriate committee
responsible for approval of the transaction may establish guidelines for
management to follow in its ongoing dealings with the related person. The policy
does not require pre-approval or ratification of any transaction with another
entity in which the related person's only relationship is as an employee (other
than an executive officer) of the entity.
We will provide a complete written copy of the policy upon written
request addressed to the Assistant Corporate Secretary at 5335 Meadows Road,
Suite 201, Lake Oswego, Oregon 97035.
Director Independence
The Board of Directors has determined that each of the current directors
standing for election, other than Mr. Sznewajs, is an "independent director"
under Rule 5605(a)(2) of NASDAQ listing standards applicable to the Company. All
members of the Board's compensation, nominating and audit committees are
"independent directors" under this standard.
In the course of determining that each director is an "independent
director" under the NASDAQ listing standards, the Board considered various loan
transactions and deposit relationships between the Bank and certain directors
(or their family members or business interests). These transactions and
relationships were entered into on the same terms prevailing at the time for
comparable transactions or relationships with other persons, as described
further under the heading "Transactions With Related Persons" above.
The independence of the Audit Committee members is described in Item 10
under the heading "Audit and Compliance Committee" above.
132
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Fees Paid to Independent Registered
Public Accountants
The following table sets forth the
aggregate fees paid to Deloitte & Touche LLP, the member firms of Deloitte
Touche Tohmatsu, and their respective affiliates (collectively, "Deloitte &
Touche"), for the years ended December 31, 2012, and December 31, 2011:
|
|
|
Year ended December 31, 2012
|
|
Year ended December 31,
2011
|
|
Description
|
|
Amount Paid
|
|
Amount Paid
|
|
Audit Fees (1)
|
|
$
|
747,574
|
|
$
|
741,000
|
|
Audit-Related Fees (2)
|
|
|
-
|
|
|
21,398
|
|
Tax Fees (3)
|
|
|
64,487
|
|
|
72,886
|
|
All Other Fees (4)
|
|
|
55,000
|
|
|
-
|
|
(1)
|
|
Fees for audit
services consist of:
|
|
|
|
|
|
Audit of the Company's annual
financial statements;
|
|
|
|
Reviews related to obligations
under the Federal Deposit Insurance Corporation Improvement
Act;
Reviews in connection with
quarterly reports filed with the SEC;
and
Other SEC-related work such as
consents and other services.
|
|
|
|
(2)
|
|
Fees for
audit-related services consist of benefit plan audits.
|
|
|
|
(3)
|
|
Fees for tax services
consist of tax compliance services, including federal, state, and local
tax preparation services and advice, and tax planning.
|
|
|
|
(4)
|
|
Fees related to
merger with Columbia.
|
The Audit
Committee has adopted pre-approval policies and procedures for pre-approving
work to be performed by Deloitte & Touche. Under Bancorp's pre-approval
policy, the Audit Committee must pre-approve all audits and permitted non-audit
services to be performed by our independent auditors. All services performed by
Deloitte & Touche during 2012 were pre-approved by the Audit Committee.
The Audit Committee has pre-approved
the use of Deloitte & Touche for certain audit services and specific types
of services characterized as audit-related and tax services. These categories
include with respect to audit services, attestation services, services
associated with SEC registration statements, and consultations with management
relating to accounting disclosure of transactions or events. With respect to
audit-related and tax services, these categories include due diligence and audit
services relating to potential mergers and acquisitions, benefit plan audits,
internal control reviews, consultations relating to disclosure treatment of
transactions, tax preparation services, and tax planning and advice. For each
category of services, the Audit Committee has set dollar limits on the amount of
services that may be provided and has required that management or the auditor’s
report back to the committee from time to time to inform members of services
actually provided and costs therefor. The Audit Committee has delegated to the
chair of the Audit Committee the authority to consider and pre-approve any
management or other request for additional services to be performed by Deloitte
& Touche.
133
