Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the audited consolidated financial statements and related notes to those statements of West Coast Bancorp (“Bancorp” or the “Company”) that
appear under the heading “Financial Statements and Supplementary Data” in Bancorp's Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 10-K”), as well as the unaudited consolidated financial statements for
the current quarter found under Item 1 above.
Forward Looking Statement Disclosure
Statements in this Quarterly Report of Bancorp, including information included or incorporated by reference herein, regarding future events or performance are “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 (the “PSLRA”) and are made pursuant to the safe harbors of the PSLRA. These forward-looking statements include, but are not limited to, (i) statements about the benefits of the Merger (as
defined below), including future financial and operating results, cost savings, enhancements to revenue and accretion to reported earnings that may be realized from the Merger; and (ii) statements about Columbia Banking System, Inc.’s
(“Columbia”) and 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,” “intends,” “may,” “should,” “plans,” “believes,” “anticipates,” “estimates,” “predicts,”
“expects,” “projects,” “potential,” or “continue,” or words of similar meaning, often help identify “forward-looking statements,” which include any statements that expressly or implicitly predict
future events, results, or performance. These forward-looking statements are based on current beliefs and expectations of 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 the forward-looking statements include, among others, risks discussed in Item 1A, “Risk Factors” of the 2011 10-K, risks
discussed elsewhere in the text of this report, as well as the following specific factors:
-
General
economic conditions, whether national or regional, and conditions in real
estate markets, that may hinder the Company’s ability to increase lending
activities or have an adverse effect on the demand for its loans and other
products, its credit quality and related levels of nonperforming assets and
loan losses, and the value and salability of the real estate that it owns or
that is the collateral for many of its loans;
-
Changing bank regulatory conditions,
policies, or programs, whether arising as new legislation or regulatory
initiatives, that could lead to restrictions on activities of banks generally
or the Bank in particular, increased costs, including deposit insurance
premiums, price controls on debit card interchange, regulation or prohibition
of certain income producing activities, or changes in the secondary market for
bank loan and other products;
-
Competitive factors, including
competition with community, regional and national financial institutions, that
may lead to pricing pressures that reduce yields the Bank earns on loans and
increase rates the Bank pays on deposits, the loss of its most valued
customers, defection of key employees or groups of employees, or other
losses;
-
Increasing or decreasing interest rate
environments, including changes in the slope and level of the yield curve,
which may be caused by the Federal Reserve Bank’s public comments about future
direction and level of interest rates, that could lead to decreases in net
interest margin, lower net interest and fee income, including lower gains on
sales of loans, higher cost of funding, and changes in the value of the
Company’s investment securities;
-
Failure to develop, implement, and
distribute competitive and client value added products, which may adversely
affect the Company’s ability to generate additional revenues;
-
Any failure to successfully implement
expense reduction initiatives and realize expected efficiencies, while
retaining revenues, that may result in lower benefits from cost reduction
initiatives than expected; and
-
Changes or failures in technology or
third party vendor relationships in important revenue production or service
areas or increases in required investments in technology that could reduce
revenues, increase costs, or lead to disruptions in the Company’s
business.
-
The Merger with Columbia may not close
when expected or at all because required regulatory, shareholder or other
approvals and other conditions to closing are not received on a timely basis
or at all;
-
Columbia’s stock price could change,
before closing of the Merger, including as a result of the financial
performance of Columbia and/or Bancorp prior to closing, or more generally due
to broader stock market movements, and the performance of financial companies
and peer group companies;
-
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;
- 33 -
-
The anticipated
growth opportunities and cost savings from the Merger may not be fully
realized or may take longer to realize than expected;
-
Operating costs, customer losses and business
disruption following the Merger, including adverse developments in
relationships with employees, may be greater than expected; and
-
Management time and effort may be diverted to the
resolution of 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 deposits, investment and borrowing
behaviors; control expenses; and monitor and manage its financial reporting,
operating and disclosure control environments.
Readers are cautioned not to place undue reliance on the Company’s
forward-looking statements, which reflect management’s analysis only as of the
date of the statements. The Company does not intend to publicly revise or update
forward-looking statements to reflect events or circumstances that arise after
the date of this report.
Community Reinvestment Act (“CRA”)
The Bank received a CRA rating of satisfactory during its most recent CRA
examination in September 2010.
Agreement and Plan of Merger
On September 25, 2012, Bancorp entered
into an Agreement and Plan of Merger (the “Merger Agreement”) with Columbia,
pursuant to which a newly formed subsidiary of Columbia will merge with and into
Bancorp (the “Merger”), with Bancorp continuing as the surviving corporation
(the “Surviving Corporation”). As soon as reasonably practicable following the
Merger, and as part of a single integrated transaction, the Surviving
Corporation will be merged with and into Columbia (the “Second Step Merger” and
together with the Merger, the “Mergers”).
Subject to the terms and conditions of the Merger Agreement, at the
effective time of the Merger, Bancorp shareholders will have the right, with
respect to each of their shares of Bancorp common stock, to elect to receive,
subject to proration and adjustment, either cash, stock, or a unit consisting of
a mix of cash and stock in an amount equal to their pro rata share (taking into
account Class C Warrants and in-the-money stock options on an as-exercised basis
and shares of common stock issuable upon conversion of Series B Preferred Stock
(including shares of Series B Preferred Stock issuable upon exercise of Class C
Warrants)) of the total consideration, which consists of $264,468,650 in cash
(subject to adjustment in certain circumstances), plus the product of 12,809,525
shares of Columbia common stock multiplied by the volume weighted average price
of Columbia common stock for the twenty trading day period beginning on the
twenty fifth day before the effective time of the Merger.
The Merger Agreement contains customary representations and warranties
from both Bancorp and Columbia. Bancorp has also agreed to various customary
covenants and agreements, including, among others, (1) to conduct its business
in the ordinary course consistent with past practice in all material respects
during the interim period between the execution of the Merger Agreement and the
consummation of the Merger, (2) not to engage in certain kinds of transactions
or take certain actions during this period without the prior written consent of
Columbia (which may not be unreasonably withheld), (3) subject to certain
exceptions, to convene and hold a meeting of its shareholders to consider and
vote upon the Merger Agreement, (4) to recommend approval of the Merger
Agreement to its shareholders and, subject to certain exceptions, not to
withdraw or materially and adversely modify such recommendation, (5) not to
initiate, solicit, encourage or knowingly facilitate any alternative proposal to
acquire Bancorp, and (6) subject to certain exceptions, not to provide any
non-public information in connection with any such alternative proposal, or
engage in any discussions relating to any such proposal. Columbia has also
agreed to various customary covenants and agreements.
The consummation of the Merger is subject to customary conditions,
including, among others, (1) approval by Bancorp shareholders of the Merger
Agreement, (2) approval by Columbia shareholders of the issuance of Columbia
common stock in connection with the Merger, (3) effectiveness of the
registration statement on Form S-4 for the Columbia common stock to be issued in
the Merger, (4) authorization for listing on the Nasdaq Stock Exchange of the
shares of Columbia common stock to be issued in the Merger, (5) the absence of
any law, order, injunction or decree prohibiting or making illegal the closing
of the Merger or the other transactions contemplated by the Merger Agreement and
(6) receipt of required regulatory approvals. Each 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.
- 34 -
The Merger
Agreement contains certain termination rights in favor of each of Columbia and
Bancorp. Upon termination of the Merger Agreement under certain circumstances,
Bancorp will be obligated to pay Columbia a termination fee of $20 million. Upon
termination of the Merger Agreement in certain other limited circumstances,
Columbia will be obligated to pay Bancorp a termination fee of $5
million.
Certain terms of the Merger Agreement and other related agreements are
summarized in, and the Merger Agreement has been filed as an exhibit to, the
Current Report on Form 8-K filed by Bancorp with the Securities and Exchange
Commission on October 1, 2012.
Current Regulatory Matters
As of June 27, 2012, the Written Agreement between the Holding Company
and the Federal Reserve Bank of San Francisco (“Reserve Bank”) and the Oregon
Department of Consumer and Business Services Division of Finance and Corporate
Securities (“DFCS”) was terminated. The termination of this agreement ends
certain restrictions on the Holding Company, including paying interest on its
$51 million in trust preferred securities outstanding. At this time, the Reserve
Bank requires that we continue to “inform and consult” with them and seek a
non-objection notice ahead of declaring and paying cash dividends to
shareholders. Bancorp received such non-objection notice in conjunction with the
$.05 per share shareholder cash dividend declared by its Board of Directors on
September 25, 2012, which is payable on October 31, 2012.
West Coast Bank continues to be subject to a Memorandum of Understanding
(“MOU”) with the Federal Deposit Insurance Corporation (“FDIC”) and DFCS, which
requires that during the life of the MOU the Bank may not pay dividends without
the written consent of the FDIC and DFCS and that the Bank maintain higher
levels of capital than required by published capital adequacy requirements. For
additional discussion of the MOU, see Item 1, “Business – Current Regulatory
Actions” in the Company’s 2011 10-K.
- 35 -
Third Quarter 2012 Financial
Overview
On September
25, 2012, the Company’s Board of Directors declared a cash dividend of $.05 per
share common share and $.50 per share of Series B Preferred Stock payable on
October 31, 2012, to shareholders of record on October 10, 2012. Amounts payable
to holders of Series B Preferred Stock are equal to amounts that would have been
received if
such
Series B preferred stock had been converted to common stock prior to payment of
the dividend. The declaration of the dividend reflected the Company’s strong
capital position and continued profitability. Key financial measures
included:
-
Net income of $5.9 million, or $6.3 million
after excluding after-tax merger-related expenses, compared to $6.3 million in
third quarter 2011. See the table below for a reconciliation of net income to
net income excluding after-tax merger-related expenses;
-
Return on average assets of .97% for the
quarter, or 1.03% excluding after-tax merger-related charges, and .99% year to
date September 30, 2012;
-
A net interest margin of 3.80%, an increase
of 49 basis points from 3.31% in third quarter 2011;
-
An average rate paid on total deposits of
.08%, a 12 basis points decline from .20% in third quarter 2011;
-
A benefit for credit losses of $.6 million,
representing a reduction of $1.7 million from a $1.1 million provision for
credit losses in the same quarter in 2011;
-
Net loan charge-offs of $1.0 million, a
decrease from $3.3 million in third quarter 2011; and
-
Total noninterest expense of $21.3 million
in third quarter 2012, or $20.7 million after excluding merger-related
expenses, as compared to noninterest expense of $22.6 million in third quarter
2011. See the table below for a reconciliation of noninterest expense to
noninterest expense excluding merger related expenses.
Management continued to proactively
implement and execute certain strategies that have resulted in strengthening of
the Company’s balance sheet, including:
-
Increasing the Bank’s total and tier 1
risk-based capital ratios to 21.06% and 19.80%, respectively, at September 30,
2012, up from 19.00% and 17.74%, respectively, at September 30,
2011;
-
Improving the Bank’s leverage ratio to
15.00% at September 30, 2012, from 13.20% a year ago; and
-
Reducing total nonperforming assets by 35%
or $28.8 million over the past twelve months, to $54.3 million at third
quarter end.
Results of Operations
Three and nine months ended
September 30, 2012 and 2011
Net Income.
Net income for the three months ended
September 30, 2012, was $5.9 million, as compared to net income of $6.3 for the
three months ended September 30, 2011. Earnings per diluted share for the three
months ended September 30, 2012, was $0.27, as compared to earnings per diluted
share of $0.29 for the three months ended September 30, 2011.
Net income for the first nine months of 2012 was $17.8 million or $.82
per diluted share compared to net income of $16.0 million or $.75 per diluted
share in the same period of 2011.
- 36 -
The table
below shows the reconciliation of net income to the non-generally accepted
accounting principles in the United States of America (“GAAP”) financial
measures presented in this report including both net income excluding after-tax
merger-related expenses and noninterest expense excluding merger-related
expenses, to the corresponding figures, net income and noninterest expense,
calculated in accordance with U.S. GAAP for the quarters ended September 30,
2012, and 2011, and the nine months ended as of September 30, 2012, and 2011.
Management uses this non-GAAP information internally and has disclosed it to
investors based on its belief that the information provides additional, valuable
information relating to its operating performance as compared to prior
periods.
Certain ratios in this report, such as
efficiency ratio and return on average assets excluding merger related expenses,
are calculated using these non-GAAP measures.
|
|
Three months ended
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
(Dollars in thousands)
|
September 30,
|
|
Change
|
|
September 30,
|
|
Change
|
|
|
2012
|
|
2011
|
|
$
|
|
2012
|
|
2011
|
|
$
|
|
Net
income
|
$
|
5,944
|
|
$
|
6,276
|
|
$
|
(332
|
)
|
|
$
|
17,767
|
|
$
|
16,015
|
|
$
|
1,752
|
|
|
|
|
Merger-related
expenses
|
|
578
|
|
|
-
|
|
|
578
|
|
|
|
578
|
|
|
-
|
|
|
578
|
|
|
Less: tax benefit from
merger-related expenses
(1)
|
|
202
|
|
|
-
|
|
|
202
|
|
|
|
202
|
|
|
-
|
|
|
202
|
|
|
After-tax
merger-related expenses
|
|
376
|
|
|
-
|
|
|
376
|
|
|
|
376
|
|
|
-
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
excluding after-tax merger-related expenses
(2,3)
|
$
|
6,320
|
|
$
|
6,276
|
|
$
|
44
|
|
|
$
|
18,143
|
|
$
|
16,015
|
|
$
|
2,128
|
|
|
|
|
Noninterest
expense
|
$
|
21,307
|
|
$
|
22,620
|
|
$
|
(1,313
|
)
|
|
$
|
63,808
|
|
$
|
68,131
|
|
$
|
(4,323
|
)
|
|
|
|
Merger-related
expenses
|
|
578
|
|
|
-
|
|
|
578
|
|
|
|
578
|
|
|
-
|
|
|
578
|
|
|
Noninterest expense excluding
merger-related expenses
(3,4)
|
$
|
20,729
|
|
$
|
22,620
|
|
$
|
(1,891
|
)
|
|
$
|
63,230
|
|
$
|
68,131
|
|
$
|
(4,901
|
)
|
|
(1)
Tax rate assumed to be
35%.
|
|
(2)
Net income excluding merger-related
expenses is GAAP net income adjusted for the after-tax impact of
merger-related expenses.
|
|
(3)
Management uses this non-GAAP information
internally and has disclosed it to investors based on its belief that the
information provides additional, valuable information relating to the
Company's operating performance as compared to prior
periods.
|
|
(4)
Noninterest expense excluding
merger-related expenses is used to calculate the efficiency ratio
excluding merger-related expenses.
|
- 37 -
Net
Interest Income.
The following table sets
forth, for the periods indicated, information with regard to (1) average
balances of assets and liabilities, (2) the total dollar amounts of interest
income on interest earning assets and interest expense on interest bearing
liabilities, (3) resulting yields and rates, (4) net interest income and (5) net
interest spread. Nonaccrual loans have been included in the tables as loans
carrying a zero yield. Loan fees are recognized as income using the interest
method over the life of the loan.
|
|
|
Three months
ended
|
|
(Dollars in thousands)
|
|
September 30,
2012
|
|
September 30,
2011
|
|
June 30,
2012
|
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Interest
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Interest
|
|
Yield/
|
|
Outstanding
|
|
Earned/
|
|
Yield/
|
|
Outstanding
|
|
Interest
|
|
Yield/
|
|
|
|
Balance
|
|
Earned/
Paid
|
|
Rate
1
|
|
Balance
|
|
Paid
|
|
Rate
1
|
|
Balance
|
|
Earned/
Paid
|
|
Rate
1
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning
balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due from banks
|
|
$
|
47,242
|
|
|
$
|
35
|
|
0.29
|
%
|
|
$
|
49,918
|
|
|
$
|
35
|
|
0.28
|
%
|
|
$
|
45,260
|
|
|
$
|
32
|
|
0.28
|
%
|
|
Federal
funds sold
|
|
|
2,558
|
|
|
|
-
|
|
0.07
|
%
|
|
|
3,275
|
|
|
|
-
|
|
0.00
|
%
|
|
|
2,555
|
|
|
|
-
|
|
0.07
|
%
|
|
Taxable securities
|
|
|
691,780
|
|
|
|
3,439
|
|
1.98
|
%
|
|
|
723,203
|
|
|
|
4,092
|
|
2.24
|
%
|
|
|
664,307
|
|
|
|
3,601
|
|
2.18
|
%
|
|
Nontaxable securities
2
|
|
|
69,226
|
|
|
|
841
|
|
4.83
|
%
|
|
|
59,121
|
|
|
|
821
|
|
5.51
|
%
|
|
|
62,546
|
|
|
|
782
|
|
5.03
|
%
|
|
Loans, including fees
3
|
|
|
1,493,454
|
|
|
|
18,706
|
|
4.98
|
%
|
|
|
1,516,311
|
|
|
|
20,060
|
|
5.25
|
%
|
|
|
1,479,524
|
|
|
|
18,699
|
|
5.08
|
%
|
|
Total interest earning assets
|
|
|
2,304,261
|
|
|
|
23,021
|
|
4.02
|
%
|
|
|
2,351,828
|
|
|
|
25,008
|
|
4.22
|
%
|
|
|
2,254,192
|
|
|
|
23,114
|
|
4.12
|
%
|
|
|
|
Allowance for loan losses
|
|
|
(32,794
|
)
|
|
|
|
|
|
|
|
|
(38,529
|
)
|
|
|
|
|
|
|
|
|
(33,699
|
)
|
|
|
|
|
|
|
|
Premises and
equipment
|
|
|
22,902
|
|
|
|
|
|
|
|
|
|
25,747
|
|
|
|
|
|
|
|
|
|
23,568
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
147,673
|
|
|
|
|
|
|
|
|
|
148,161
|
|
|
|
|
|
|
|
|
|
151,216
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,442,042
|
|
|
|
|
|
|
|
|
$
|
2,487,207
|
|
|
|
|
|
|
|
|
$
|
2,395,277
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
demand
|
|
$
|
365,560
|
|
|
$
|
37
|
|
0.04
|
%
|
|
$
|
363,554
|
|
|
$
|
45
|
|
0.05
|
%
|
|
$
|
374,579
|
|
|
$
|
33
|
|
0.04
|
%
|
|
Savings
|
|
|
132,839
|
|
|
|
17
|
|
0.05
|
%
|
|
|
114,779
|
|
|
|
25
|
|
0.09
|
%
|
|
|
127,930
|
|
|
|
16
|
|
0.05
|
%
|
|
Money market
|
|
|
592,363
|
|
|
|
129
|
|
0.09
|
%
|
|
|
661,871
|
|
|
|
322
|
|
0.19
|
%
|
|
|
596,949
|
|
|
|
135
|
|
0.09
|
%
|
|
Time
deposits
|
|
|
140,151
|
|
|
|
202
|
|
0.57
|
%
|
|
|
196,807
|
|
|
|
594
|
|
1.20
|
%
|
|
|
151,085
|
|
|
|
247
|
|
0.66
|
%
|
|
Total interest bearing deposits
|
|
|
1,230,913
|
|
|
|
385
|
|
0.13
|
%
|
|
|
1,337,011
|
|
|
|
986
|
|
0.29
|
%
|
|
|
1,250,543
|
|
|
|
431
|
|
0.14
|
%
|
|
|
|
Short-term borrowings
4
|
|
|
17,989
|
|
|
|
37
|
|
0.81
|
%
|
|
|
39,926
|
|
|
|
939
|
|
9.33
|
%
|
|
|
3,143
|
|
|
|
4
|
|
0.51
|
%
|
|
Long-term borrowings
4
5
|
|
|
161,074
|
|
|
|
617
|
|
1.45
|
%
|
|
|
180,428
|
|
|
|
3,455
|
|
7.60
|
%
|
|
|
175,098
|
|
|
|
633
|
|
1.44
|
%
|
|
Total borrowings
|
|
|
179,063
|
|
|
|
654
|
|
1.47
|
%
|
|
|
220,354
|
|
|
|
4,394
|
|
7.91
|
%
|
|
|
178,241
|
|
|
|
637
|
|
1.44
|
%
|
|
Total interest bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
|
1,409,976
|
|
|
|
1,039
|
|
0.29
|
%
|
|
|
1,557,365
|
|
|
|
5,380
|
|
1.37
|
%
|
|
|
1,428,784
|
|
|
|
1,068
|
|
0.30
|
%
|
|
Demand
deposits
|
|
|
677,646
|
|
|
|
|
|
|
|
|
|
615,956
|
|
|
|
|
|
|
|
|
|
621,547
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
23,063
|
|
|
|
|
|
|
|
|
|
22,779
|
|
|
|
|
|
|
|
|
|
21,550
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,110,685
|
|
|
|
|
|
|
|
|
|
2,196,100
|
|
|
|
|
|
|
|
|
|
2,071,881
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
331,357
|
|
|
|
|
|
|
|
|
|
291,107
|
|
|
|
|
|
|
|
|
|
323,396
|
|
|
|
|
|
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders' equity
|
|
$
|
2,442,042
|
|
|
|
|
|
|
|
|
$
|
2,487,207
|
|
|
|
|
|
|
|
|
$
|
2,395,277
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
21,982
|
|
|
|
|
|
|
|
|
$
|
19,628
|
|
|
|
|
|
|
|
|
$
|
22,046
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
2.85
|
%
|
|
|
|
|
|
|
|
|
3.82
|
%
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
3.80
|
%
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
3.93
|
%
|
|
1
|
Yield/rate calculations have been based on more detailed
information and therefore may not recompute exactly due to
rounding.
|
|
2
|
Interest earned on nontaxable securities has been computed on a 35%
tax equivalent basis.
|
|
3
|
Includes balances of loans held for sale and nonaccrual
loans.
|
|
4
|
Includes portion of $2.8 million prepayment fee in connection with
the $88.3 million prepayment in FHLB borrowings in the third quarter of
2011.
|
|
5
|
Includes junior subordinated debentures with average balance of
$51.0 million for the three months ended September 30, 2012, and 2011, and
June 30, 2012.
|
- 38 -
Third quarter
2012 net interest income of $21.7 million increased $2.3 million from the same
quarter in 2011 due to a prepayment charge of $2.8 million in the third quarter
of 2011 associated with the prepayment of $88.3 million in term Federal Home Loan Bank of
Seattle (“FHLB”) borrowings. The current quarter also reflects the benefit from
the prepayment in the second half of 2011 of a total of $168.6 million term FHLB
borrowings, with an average interest rate of 3.17%, which were partially
replaced by $120.0 million in new FHLB borrowings at an average interest rate of
1.05%. Net interest income on a tax equivalent basis was $22.0 million in the
most recent quarter, up from $19.6 million in the third quarter of 2011. Third
quarter 2012 average interest earning assets of $2.30 billion decreased $47.6
million, or 2.0%, from $2.35 billion in the same period in 2011. Average
interest bearing liabilities of $1.41 billion declined $147.4 million or 9.5%,
from $1.56 billion over the same period, while average noninterest bearing
demand deposits increased $61.7 million or 10.0% over the same
period.
The third quarter 2012 net interest margin of 3.80% increased 49 basis
points from third quarter 2011, principally due to the impact of the FHLB
prepayment in the third quarter last year and lower volume and cost of
interest-bearing liabilities more than offsetting the effect of a year-over-year
decline in average loan balances and lower yields on loan and investment
portfolios.
Net interest income for the nine months ended September 30, 2012, was
$65.6 million, an increase of $2.8 million compared to the same period in 2011.
For the nine months ended September 30, 2012, net interest margin was 3.92%, an
increase of 27 basis points from 3.65% for the nine months ended September 30,
2011. The increase in net interest income and margin for the nine month period
was substantially due to the same factors as for the increase in year-over-year
third quarter net interest income and margin.
As of September 30, 2012, the Bank had $771.5 million in floating and
adjustable rate loans with interest rate floors, with $605.6 million of these
loans at their floor rate. At September 30, 2011, the Bank had $708.3 million in
floating and adjustable rate loans with interest rate floors, with $520.3
million of these loans at their floor rate. The floors have benefited the
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, however, the Company anticipates yields on loans at floors will lag
underlying changes in market interest rates, although the overall effect will
depend on how quickly and dramatically market interest rates rise, as well as
how the slope of the market yield curve changes.
At September 30, 2012, management estimated that the Company’s current
balance sheet remained slightly asset sensitive over a twelve month measurement
period given instantaneous parallel rate shocks. Asset sensitive means that
earning assets are expected to mature or reprice more quickly than interest
bearing liabilities over this period under the parallel rate shocks. Management
believes its estimates of the Company’s interest rate risk position are highly
dependent upon a number of assumptions regarding the repricing behavior of
various deposit, investment, and loan types in response to changes in both
short-term and long-term interest rates, balance sheet composition, and other
modeling assumptions, actions of competitors and customers in response to those
changes. Whether interest rate parallel rate shocks or gradual interest rate
changes are utilized in modeling, will also affect its estimates of its interest
rate risk position. For more information see the discussion under the heading
“Quantitative and Qualitative Disclosures about Market Risk” in the Company’s
2011 10-K.
Provision for Credit Losses.
Bancorp recorded a benefit for credit losses for the third quarter of
2012 of $.6 million compared to a provision for credit losses of $1.1 million in
the third quarter of 2011. The benefit for credit losses in third quarter 2012
reflects an overall improved risk profile of the loan portfolio evidenced by
modest charge-off activity, low delinquency, and a positive risk rating
migration. The benefit for credit losses was $1.0 million for the nine months
ended September 30, 2012, compared to a provision for credit losses of $6.6
million in the same period of 2011. The reduction in 2012 year-to-date net
charge-offs compared to the same period in 2011 was heavily influenced by a
recovery of $1.1 million related to a commercial real estate loan in the second
quarter of 2012.
The provision for credit losses in future periods will depend primarily
on economic conditions and the interest rate environment, as weakening economic
conditions or an increase in interest rates could put pressure on the ability of
the Bank’s borrowers to repay loans. For more information, see the discussion
under the subheading “Allowance for Credit Losses and Net Loan Charge-offs”
below.
Noninterest Income.
Total
noninterest income of $8.2 million for the quarter ended September 30, 2012,
decreased $.2 million from $8.4 million in the third quarter of 2011. The
decline can be attributed to a $.7 million decrease in gains on sales of Other
Real Estate Owned (“OREO”) and slightly lower service charges on deposit
accounts and payment systems-related revenues. These declines were partly offset
by a $.3 million increase in gains on sales of loans, an increase in trust and
investment services revenues, and lower OREO valuation adjustments. Total net
loss on OREO was $.5 million in the quarter ended September 30, 2012, as
compared to virtually no net loss in the same quarter of 2011. Total noninterest
income decreased 4% or $.3 million from the second quarter of 2012, as a lower
total net loss on OREO did not offset declines in remaining noninterest income
categories. The Company recognized $.4 million less in gains on sales of Small
Business Administration loans in the third quarter of 2012 compared to the prior
quarter and realized and no gains on sales of securities in the most recent
quarter.
Noninterest income for the nine months ended September 30, 2012, was
$24.6 million, a decline of $.8 million from $25.4 million in the same period in
2011. The year-to-date decrease in noninterest income was primarily due to a
$1.3 million decrease in service charges on deposit accounts and a $.7 million
decrease in OREO gains on sale partly offset by an increase of $.9 million in
gains on sales of loans.
- 39 -
The following
table illustrates the components of and changes in noninterest income for the
periods shown:
|
|
|
Three months ended
|
|
|
|
Three months ended
|
|
|
|
(Dollars in thousands)
|
|
September 30,
|
|
Change
|
|
June 30,
|
|
Change
|
|
|
|
2012
|
|
2011
|
|
$
|
|
%
|
|
2012
|
|
$
|
|
%
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit
accounts
|
|
$
|
3,017
|
|
|
$
|
3,129
|
|
|
$
|
(112
|
)
|
|
-4
|
%
|
|
$
|
3,212
|
|
|
$
|
(195
|
)
|
|
-6
|
%
|
|
Payment
systems related revenue
|
|
|
3,073
|
|
|
|
3,201
|
|
|
|
(128
|
)
|
|
-4
|
%
|
|
|
3,084
|
|
|
|
(11
|
)
|
|
-
|
|
Trust and investment services
revenues
|
|
|
1,231
|
|
|
|
1,033
|
|
|
|
198
|
|
|
19
|
%
|
|
|
1,457
|
|
|
|
(226
|
)
|
|
-16
|
%
|
|
Gains
on sales of loans
|
|
|
492
|
|
|
|
222
|
|
|
|
270
|
|
|
122
|
%
|
|
|
722
|
|
|
|
(230
|
)
|
|
-32
|
%
|
|
Gains (losses) on sales of
securities
|
|
|
-
|
|
|
|
124
|
|
|
|
(124
|
)
|
|
-100
|
%
|
|
|
228
|
|
|
|
(228
|
)
|
|
-100
|
%
|
|
Other-than-temporary impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
816
|
|
|
|
716
|
|
|
|
100
|
|
|
14
|
%
|
|
|
821
|
|
|
|
(5
|
)
|
|
-1
|
%
|
|
Total
|
|
|
8,629
|
|
|
|
8,425
|
|
|
|
204
|
|
|
2
|
%
|
|
|
9,524
|
|
|
|
(895
|
)
|
|
-9
|
%
|
|
|
|
OREO
gains (losses) on sale
|
|
|
29
|
|
|
|
685
|
|
|
|
(656
|
)
|
|
-96
|
%
|
|
|
183
|
|
|
|
(154
|
)
|
|
84
|
%
|
|
OREO valuation
adjustments
|
|
|
(486
|
)
|
|
|
(696
|
)
|
|
|
210
|
|
|
30
|
%
|
|
|
(1,213
|
)
|
|
|
727
|
|
|
60
|
%
|
|
Total
|
|
|
(457
|
)
|
|
|
(11
|
)
|
|
|
(446
|
)
|
|
-4055
|
%
|
|
|
(1,030
|
)
|
|
|
573
|
|
|
56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
8,172
|
|
|
$
|
8,414
|
|
|
$
|
(242
|
)
|
|
-3
|
%
|
|
$
|
8,494
|
|
|
$
|
(322
|
)
|
|
-4
|
%
|
Noninterest Expense.
Noninterest expense for the three months ended September 30, 2012, of $21.3
million, declined $1.3 million or 6% from $22.6 million in third quarter 2011.
Excluding expenses associated with the previously announced plan of Merger with
Columbia, total noninterest expense declined $1.9 million or 8% over the same
period. Principally as a result of cost savings initiatives implemented over the
past year, expenses declined in nearly all categories from the corresponding
quarter in 2011. Noninterest expenses also declined across most categories on a
linked quarter basis.
Noninterest expense for the nine months ended September 30, 2012, was
$63.8 million, a decrease of $4.3 million or 6.3% from $68.1 million for the
nine months ended September 30, 2011. The Company’s efficiency ratio, defined as
noninterest expense divided by the sum of net interest income on a tax
equivalent basis and noninterest income excluding gains and losses on sales of
securities, declined to 70.4% in the nine months ended September 30, 2012, from
77.0% for the same period in 2011.
The following table illustrates the components of and changes in
noninterest expense for the periods shown:
|
|
|
Three months ended
|
|
|
|
Three months ended
|
|
|
|
(Dollars in thousands)
|
|
September 30,
|
|
September 30,
|
|
Change
|
|
June 30,
|
|
Change
|
|
|
|
2012
|
|
2011
|
|
$
|
|
%
|
|
2012
|
|
$
|
|
%
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
$
|
11,499
|
|
$
|
11,977
|
|
$
|
(478
|
)
|
|
-4
|
%
|
|
$
|
12,081
|
|
$
|
(582
|
)
|
|
-5
|
%
|
|
Equipment
|
|
|
1,480
|
|
|
1,461
|
|
|
19
|
|
|
1
|
%
|
|
|
1,584
|
|
|
(104
|
)
|
|
-7
|
%
|
|
Occupancy
|
|
|
1,901
|
|
|
2,115
|
|
|
(214
|
)
|
|
-10
|
%
|
|
|
2,119
|
|
|
(218
|
)
|
|
-10
|
%
|
|
Payment
systems related expense
|
|
|
1,148
|
|
|
1,279
|
|
|
(131
|
)
|
|
-10
|
%
|
|
|
1,075
|
|
|
73
|
|
|
7
|
%
|
|
Professional fees
|
|
|
777
|
|
|
1,038
|
|
|
(261
|
)
|
|
-25
|
%
|
|
|
1,060
|
|
|
(283
|
)
|
|
-27
|
%
|
|
Postage, printing and office supplies
|
|
|
735
|
|
|
772
|
|
|
(37
|
)
|
|
-5
|
%
|
|
|
729
|
|
|
6
|
|
|
1
|
%
|
|
Marketing
|
|
|
520
|
|
|
862
|
|
|
(342
|
)
|
|
-40
|
%
|
|
|
255
|
|
|
265
|
|
|
104
|
%
|
|
Communications
|
|
|
411
|
|
|
387
|
|
|
24
|
|
|
6
|
%
|
|
|
419
|
|
|
(8
|
)
|
|
-2
|
%
|
|
Other noninterest
expense
|
|
|
2,258
|
|
|
2,729
|
|
|
(471
|
)
|
|
-17
|
%
|
|
|
2,154
|
|
|
104
|
|
|
5
|
%
|
|
Total noninterest expense excluding merger
expenses
|
|
$
|
20,729
|
|
$
|
22,620
|
|
$
|
(1,891
|
)
|
|
-8
|
%
|
|
$
|
21,476
|
|
$
|
(747
|
)
|
|
-3
|
%
|
|
|
|
Merger
expense
|
|
|
578
|
|
|
-
|
|
|
578
|
|
|
0
|
%
|
|
|
-
|
|
|
578
|
|
|
0
|
%
|
|
Total noninterest expense
|
|
$
|
21,307
|
|
$
|
22,620
|
|
$
|
(1,313
|
)
|
|
-6
|
%
|
|
$
|
21,476
|
|
$
|
(169
|
)
|
|
-1
|
%
|
Changing
business conditions, increased costs in connection with retention of, or a
failure to retain, key employees, lower loan production volumes causing deferred
loan origination costs to decline, compliance with regulatory guidance, or a
failure to manage operating and control environments could adversely affect the
Company’s ability to control its expenses in the future.
Income Taxes
. The Company
recorded an income tax provision for the three months ended September 30, 2012,
of $3.2 million compared to a $2.3 million benefit during the third quarter of
2011. For the nine months period ended September 30, 2012, the Company recorded
an income tax provision of $9.6 million compared to an income tax benefit of
$2.6 million in the first nine months of 2011. The three and nine month period
ended September 30, 2012, provision for income taxes is the result of an
effective tax rate of 35% on income before income taxes. The provision for
income taxes in the three and nine month period ended September 30, 2011,
reflected the impact of the Company’s deferred tax asset valuation allowance at
that time, which was subsequently fully reversed in the fourth quarter of
2011.
- 40 -
Balance Sheet
Overview
Balance sheet
highlights are as follows:
-
Total assets were $2.5 billion as of September 30,
2012, substantially unchanged from December 31, 2011;
-
Total loans of $1.5 billion as of September 30,
2012, remained relatively unchanged from year end 2012 and from June 30,
2012;
-
The combined average total cash equivalents and
investment securities was $811 million, or 35% of average earning assets,
during the quarter ended September 30, 2012; and
-
Total deposits of $1.9 billion at September 30,
2012, increased slightly from year end 2011.
The Company’s balance sheet management efforts are focused on increasing
loan balances with new loan production within established concentration
parameters to targeted customer segments as opportunities arise, limiting loan
concentrations within our loan portfolio, maintaining a strong capital position
until the Company have more certainty regarding prospective economic conditions,
and retaining sufficient liquidity. While new loan commitment production year-to-date has increased from the same period in 2011, loan growth remains challenging due to loan prepayments, modest draws on lines of credit, and a continued to decline in our sizeable home equity portfolio. The Company also expects to further reduce
nonperforming assets by resolving nonaccrual loans and disposing of OREO
properties.
Cash and Cash Equivalents
Total cash and cash equivalents at September 30, 2012, of $101.3 million,
increased from December 31, 2011 due to higher interest bearing deposits held in
other banks, and decreased slightly from September 30, 2011.
|
(Dollars in thousands)
|
|
September 30,
|
|
% of
|
|
December 31,
|
|
% of
|
|
Change
|
|
|
|
|
September 30,
|
|
% of
|
|
|
|
2012
|
|
total
|
|
2011
|
|
total
|
|
Amount
|
|
%
|
|
2011
|
|
total
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
53,026
|
|
52
|
%
|
|
$
|
59,955
|
|
65
|
%
|
|
$
|
(6,929
|
)
|
|
-12
|
%
|
|
$
|
57,442
|
|
54
|
%
|
|
Federal funds
sold
|
|
|
3,426
|
|
4
|
%
|
|
|
4,758
|
|
5
|
%
|
|
|
(1,332
|
)
|
|
-28
|
%
|
|
|
2,102
|
|
2
|
%
|
|
Interest-bearing deposits in other banks
|
|
|
44,883
|
|
44
|
%
|
|
|
27,514
|
|
30
|
%
|
|
|
17,369
|
|
|
63
|
%
|
|
|
47,734
|
|
44
|
%
|
|
Total cash and cash
equivalents
|
|
$
|
101,335
|
|
100
|
%
|
|
$
|
92,227
|
|
100
|
%
|
|
$
|
9,108
|
|
|
10
|
%
|
|
|
107,278
|
|
100
|
%
|
Investment
Portfolio
The compositions and carrying values of Bancorp’s investment securities
portfolio were as follows:
|
|
|
September 30, 2012
|
|
December 31, 2011
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
Net
|
|
|
|
Amortized
|
|
|
|
|
Unrealized
|
|
Amortized
|
|
|
|
|
Unrealized
|
|
Amortized
|
|
|
|
|
Unrealized
|
|
(Dollars in thousands)
|
|
Cost
|
|
Fair Value
|
|
Gain/(Loss)
|
|
Cost
|
|
Fair Value
|
|
Gain/(Loss)
|
|
Cost
|
|
Fair Value
|
|
Gain/(Loss)
|
|
U.S. Treasury
securities
|
|
$
|
200
|
|
$
|
200
|
|
$
|
-
|
|
|
$
|
200
|
|
$
|
203
|
|
$
|
3
|
|
|
$
|
200
|
|
$
|
205
|
|
$
|
5
|
|
|
U.S. Government agency securities
|
|
|
225,728
|
|
|
230,360
|
|
|
4,632
|
|
|
|
216,211
|
|
|
219,631
|
|
|
3,420
|
|
|
|
274,282
|
|
|
277,669
|
|
|
3,387
|
|
|
Corporate
securities
|
|
|
14,303
|
|
|
9,019
|
|
|
(5,284
|
)
|
|
|
14,351
|
|
|
8,507
|
|
|
(5,844
|
)
|
|
|
14,352
|
|
|
8,858
|
|
|
(5,494
|
)
|
|
Mortgage-backed securities
|
|
|
447,437
|
|
|
461,077
|
|
|
13,640
|
|
|
|
419,510
|
|
|
428,725
|
|
|
9,215
|
|
|
|
450,334
|
|
|
460,927
|
|
|
10,593
|
|
|
Obligations of state and
political subdivisions
|
|
|
74,948
|
|
|
80,116
|
|
|
5,168
|
|
|
|
56,003
|
|
|
60,732
|
|
|
4,729
|
|
|
|
59,736
|
|
|
63,761
|
|
|
4,025
|
|
|
Equity and other securities
|
|
|
11,240
|
|
|
11,885
|
|
|
645
|
|
|
|
11,318
|
|
|
12,046
|
|
|
728
|
|
|
|
11,345
|
|
|
12,038
|
|
|
693
|
|
|
Total Investment
Portfolio
|
|
$
|
773,856
|
|
$
|
792,657
|
|
$
|
18,801
|
|
|
$
|
717,593
|
|
$
|
729,844
|
|
$
|
12,251
|
|
|
$
|
810,249
|
|
$
|
823,458
|
|
$
|
13,209
|
|
At September 30, 2012, the estimated fair value of the
investment portfolio was $792.7 million, compared to $729.8 million at year end
2011, an increase of 8.6% or $62.9 million. The net unrealized gain in the
investment portfolio was $18.8 million at September 30, 2012, an increase from
$12.3 million at December 31, 2011.
The investment portfolio (amortized cost) increased $56.3 million since
December 31, 2011. The Company has increased its investments in municipal
securities and its U.S. government agency portfolio. During this time, purchases
consisted principally of Oregon and Washington school district municipal
securities with state guarantees and 10-year and 15-year fully amortizing U.S.
government agency mortgage-backed securities.
The expected duration of the investment portfolio
was 2.7 years at September 30, 2012, compared to 2.3 years at September 30,
2011, and 2.5 years at December 31, 2011.
The Company recorded a credit related other-than-temporary impairment
(“OTTI”) charge of $.2 million pretax in the second quarter of 2011, related to
a pooled trust preferred security in the Company’s investment portfolio. Based
on its assessment, management determined that the impairment for this security
was other-than-temporary in accordance with Generally Accepted Accounting
Principles (“GAAP”) and that a charge was appropriate. Given regulatory
guidelines on expectation of full payment of interest and principal as well as
extended principal in kind payments, this pooled trust preferred security was
placed on nonaccrual status. An additional credit related OTTI charge of $49,000
pretax relating to this same security was deemed necessary in the first quarter
of 2012. Furthermore, in the fourth quarter 2011 the Company placed another
pooled trust preferred security with principal in kind payments on nonaccrual
status. While this security had an impairment loss of $1.5 million at
September 30, 2012, the security had no credit related OTTI as of September 30,
2012.
- 41 -
For additional
detail regarding the Company’s investment securities portfolio, see Note 4
“Investment Securities” and Note 10 “Fair Value Measurement and Fair Values of
Financial Instruments” of the interim financial statements included under Item 1
of this report.
Loan Portfolio
The compositions of the Bank’s loan portfolio was as follows for the
periods shown:
|
(Dollars in thousands)
|
|
September 30,
|
|
% of total
|
|
Dec. 31,
|
|
% of total
|
|
Change
|
|
September 30,
|
|
% of total
|
|
Change
|
|
|
|
2012
|
|
loans
|
|
2011
|
|
loans
|
|
Amount
|
|
2011
|
|
loans
|
|
Amount
|
|
Commercial loans
|
|
$
|
286,134
|
|
19.2
|
%
|
|
$
|
299,766
|
|
20.0
|
%
|
|
$
|
(13,632
|
)
|
|
$
|
296,335
|
|
19.7
|
%
|
|
$
|
(10,201
|
)
|
|
Commercial real estate construction
|
|
|
39,100
|
|
2.6
|
%
|
|
|
17,438
|
|
1.2
|
%
|
|
|
21,662
|
|
|
|
12,859
|
|
0.9
|
%
|
|
|
26,241
|
|
|
Residential real estate
construction
|
|
|
8,306
|
|
0.6
|
%
|
|
|
12,724
|
|
0.8
|
%
|
|
|
(4,418
|
)
|
|
|
13,167
|
|
0.9
|
%
|
|
|
(4,861
|
)
|
|
Total real estate construction
loans
|
|
|
47,406
|
|
3.2
|
%
|
|
|
30,162
|
|
2.0
|
%
|
|
|
17,244
|
|
|
|
26,026
|
|
1.8
|
%
|
|
|
21,380
|
|
|
Mortgage
|
|
|
56,548
|
|
3.8
|
%
|
|
|
66,610
|
|
4.4
|
%
|
|
|
(10,062
|
)
|
|
|
69,333
|
|
4.6
|
%
|
|
|
(12,785
|
)
|
|
Home
equity loans and lines of credit
|
|
|
244,683
|
|
16.4
|
%
|
|
|
258,384
|
|
17.2
|
%
|
|
|
(13,701
|
)
|
|
|
261,457
|
|
17.4
|
%
|
|
|
(16,774
|
)
|
|
Total real estate mortgage
loans
|
|
|
301,231
|
|
20.2
|
%
|
|
|
324,994
|
|
21.6
|
%
|
|
|
(23,763
|
)
|
|
|
330,790
|
|
22.0
|
%
|
|
|
(29,559
|
)
|
|
Commercial real estate loans
|
|
|
843,836
|
|
56.6
|
%
|
|
|
832,767
|
|
55.4
|
%
|
|
|
11,069
|
|
|
|
836,752
|
|
55.6
|
%
|
|
|
7,084
|
|
|
Installment and other
consumer loans
|
|
|
12,160
|
|
0.8
|
%
|
|
|
13,612
|
|
1.0
|
%
|
|
|
(1,452
|
)
|
|
|
13,721
|
|
0.9
|
%
|
|
|
(1,561
|
)
|
|
Total
loans
|
|
$
|
1,490,767
|
|
100.0
|
%
|
|
$
|
1,501,301
|
|
100.0
|
%
|
|
$
|
(10,534
|
)
|
|
$
|
1,503,624
|
|
100.0
|
%
|
|
$
|
(12,857
|
)
|
The Bank’s total loan portfolio was $1.5
billion at September 30, 2012, a decrease of $10.5 million or .7% from December
31, 2011. The decline was principally a result of lower commercial, mortgage,
and home equity balances partially offset by higher commercial real estate
construction and commercial real estate term loan balances. The Bank’s loan
portfolio decreased $12.9 million from September 30, 2011. Third quarter 2012
new loan commitment production increased significantly from the same quarter of
2011.
Interest and fees earned on the loan portfolio are the Bank’s primary
source of revenue, and it will be very important to generate sufficient new loan
commitment originations to increase loan balances in order to grow overall
revenues. The Company’s ability to achieve loan growth at acceptable spreads
will be dependent on many factors, including the effects of competition,
economic conditions in our markets, health of the real estate market, retention
of key personnel and valued customers, and the ability to close loans in the
pipeline.
At September 30, 2012, the Bank had outstanding loans of $.2 million to
persons serving as directors, executive officers, principal stockholders and
their related interests. These loans, when made, were in the ordinary course of
business on substantially the same terms, including interest rates, maturities
and collateral, as comparable loans made to customers not related to the Bank.
At September 30, 2012, and December 31, 2011, Bancorp had no bankers’
acceptances.
Below is a discussion of the Company’s loan portfolio by
category.
Commercial.
At September
30, 2012, the outstanding balance of commercial loans and lines was $286.1
million or approximately 19% of the Company’s total loan portfolio. The total
commercial lines and loans balance decreased by $13.7 million or 5% from $299.8
million at year end 2011.
At September 30, 2012, commercial lines of credit accounted for $179.0
million or 63% of total outstanding commercial loans and lines, while commercial
term loans accounted for $107.1 million, or 37% of the total.
Real Estate Construction.
At September 30, 2012, the balance of
real estate construction loans was $47.4 million, an increase of $17.2 million
or 57% from $30.2 million at December 31, 2011, with the increase centered in
commercial real estate construction loans. Total real estate construction loans
represented approximately 3% of the total loan portfolio at the end of the third
quarter compared to 2% at December 31, 2011. Additionally, at the end of the
third quarter 2012, the Bank’s real estate construction concentration at 12%
relative to Tier 1 capital and allowance for credit losses was well within the
Interagency Guidelines for Real Estate Lending and the Commercial Real Estate
Lending Joint Guidance policy guidelines which set forth a 100% limit for such
ratio.
While the supply and market demand for homes is more in balance than in
recent years, the volume of new homes being constructed remains well below the
activity in years prior to the most recent recession. For certain home price
levels, there is also uncertainty surrounding the level of shadow inventory that
may exist in the market. As a consequence, there is relatively limited overall
demand for new single family residential construction loans in the Bank’s market
place. While the Bank participates in a limited way in vertical construction
financing it still views residential construction lending as high
risk.
- 42 -
Real Estate
Mortgage.
The following table presents the
components of the real estate mortgage loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
December 31, 2011
|
|
December 31, 2011
|
|
September 30, 2011
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
loan
|
|
|
|
|
loan
|
|
|
|
|
|
|
|
|
|
|
|
loan
|
|
(Dollars in thousands)
|
|
Amount
|
|
category
|
|
Amount
|
|
category
|
|
Amount
|
|
Percent
|
|
Amount
|
|
category
|
|
Mortgage
|
|
$
|
56,548
|
|
19
|
%
|
|
$
|
66,610
|
|
21
|
%
|
|
$
|
(10,062
|
)
|
|
-15
|
%
|
|
$
|
69,333
|
|
21
|
%
|
|
Home equity loans and lines of
credit
|
|
|
244,683
|
|
81
|
%
|
|
|
258,384
|
|
79
|
%
|
|
|
(13,701
|
)
|
|
-5
|
%
|
|
|
261,457
|
|
79
|
%
|
|
Total real estate
mortgage
|
|
$
|
301,231
|
|
100
|
%
|
|
$
|
324,994
|
|
100
|
%
|
|
$
|
(23,763
|
)
|
|
-7
|
%
|
|
$
|
330,790
|
|
100
|
%
|
At September 30, 2012, real estate mortgage loans totaled $301.2 million
or approximately 20% of the Company’s total loan portfolio. The mortgage loan
category included $5.9 million in nonstandard mortgage loans, a decline from
$8.5 million at December 31, 2011, and $9.9 million a year ago. At September 30,
2012, mortgage loans excluding nonstandard mortgage loans measured $50.6
million, a decline from $59.4 million a year ago. Standard residential mortgage
loans to borrowers represented $26.2 million of the mortgage loan category,
while the remaining $24.4 million were associated with commercial interests
utilizing residences as collateral. Such commercial interests included $17.0
million related to businesses, $1.8 million related to condominiums, and $2.2
million related to ownership of residential land.
Home equity lines and loans, totaled $244.7 million, and represented 16%
of the loan portfolio at September 30, 2012, a decline of $16.8 million from
$261.5 million a year earlier. The overall home equity line utilization measured
approximately 62% at September 30, 2012, which was relatively unchanged from the
line utilization a year ago. The Bank’s home equity portfolio balances have
trended lower as payoffs have increased and new loan and line originations
within this portfolio slowed significantly over the past few years.
The following table shows home equity
lines of credit and loans by market areas at the dates shown and, with the
exception of Bend where the Company no longer has a branch presence, indicates a
geographic distribution of balances remaining fairly representative of the
Bank’s branch presence in these markets:
|
(Dollars in thousands)
|
|
September 30, 2012
|
|
December 31, 2011
|
|
Region
|
|
Amount
|
|
Percent of total
|
|
Amount
|
|
Percent of total
|
|
Portland-Beaverton, Oregon
/ Vancouver, Washington
|
|
$
|
115,648
|
|
47.2
|
%
|
|
$
|
122,543
|
|
47.4
|
%
|
|
Salem, Oregon
|
|
|
59,892
|
|
24.4
|
%
|
|
|
61,019
|
|
23.6
|
%
|
|
Oregon non-metropolitan
area
|
|
|
26,139
|
|
10.7
|
%
|
|
|
27,419
|
|
10.6
|
%
|
|
Olympia, Washington
|
|
|
15,335
|
|
6.3
|
%
|
|
|
17,268
|
|
6.7
|
%
|
|
Washington
non-metropolitan area
|
|
|
12,368
|
|
5.1
|
%
|
|
|
12,859
|
|
5.0
|
%
|
|
Bend, Oregon
|
|
|
3,837
|
|
1.6
|
%
|
|
|
4,377
|
|
1.7
|
%
|
|
Other
|
|
|
11,464
|
|
4.7
|
%
|
|
|
12,899
|
|
5.0
|
%
|
|
Total
home equity loan and line portfolio
|
|
$
|
244,683
|
|
100
|
%
|
|
$
|
258,384
|
|
100.0
|
%
|
Should weaknesses in the housing market continue, coupled with persistent
high unemployment in the Company’s markets, increased real estate mortgage
delinquencies and charge-offs may result going forward. Additionally, there may
be requests made in the future for repurchases of real estate mortgage loans
previously sold by the Company in the secondary market. At September 30, 2012,
the number of repurchase requests and the balances associated with those
requests were not material.
- 43 -
Commercial
Real Estate.
The composition of the
commercial real estate loan portfolio based on collateral type was as follows:
|
(Dollars in thousands)
|
|
September 30, 2012
|
|
December 31, 2011
|
|
September 30, 2011
|
|
|
|
|
|
|
% of loan
|
|
|
|
|
% of loan
|
|
|
|
|
% of loan
|
|
|
|
Amount
|
|
category
|
|
Amount
|
|
category
|
|
Amount
|
|
category
|
|
Office Buildings
|
|
$
|
171,213
|
|
20.3
|
%
|
|
$
|
173,295
|
|
20.8
|
%
|
|
$
|
183,146
|
|
21.9
|
%
|
|
Retail Facilities
|
|
|
119,482
|
|
14.2
|
%
|
|
|
118,678
|
|
14.3
|
%
|
|
|
114,606
|
|
13.7
|
%
|
|
Multi-Family - 5+
Residential
|
|
|
86,327
|
|
10.2
|
%
|
|
|
63,027
|
|
7.6
|
%
|
|
|
60,731
|
|
7.3
|
%
|
|
Commercial/Agricultural
|
|
|
60,711
|
|
7.2
|
%
|
|
|
60,094
|
|
7.2
|
%
|
|
|
60,059
|
|
7.2
|
%
|
|
Medical Offices
|
|
|
57,705
|
|
6.8
|
%
|
|
|
60,993
|
|
7.3
|
%
|
|
|
57,781
|
|
6.9
|
%
|
|
Industrial parks and related
|
|
|
56,234
|
|
6.7
|
%
|
|
|
55,392
|
|
6.7
|
%
|
|
|
58,310
|
|
7.0
|
%
|
|
Hotels/Motels
|
|
|
48,162
|
|
5.7
|
%
|
|
|
35,893
|
|
4.3
|
%
|
|
|
35,027
|
|
4.2
|
%
|
|
Manufacturing Plants
|
|
|
47,241
|
|
5.6
|
%
|
|
|
51,852
|
|
6.2
|
%
|
|
|
53,109
|
|
6.3
|
%
|
|
Mini Storage
|
|
|
22,413
|
|
2.7
|
%
|
|
|
19,037
|
|
2.3
|
%
|
|
|
21,795
|
|
2.6
|
%
|
|
Food Establishments
|
|
|
19,096
|
|
2.3
|
%
|
|
|
19,054
|
|
2.3
|
%
|
|
|
19,132
|
|
2.3
|
%
|
|
Assisted Living
|
|
|
17,291
|
|
2.0
|
%
|
|
|
22,040
|
|
2.6
|
%
|
|
|
22,191
|
|
2.7
|
%
|
|
Land Development and Raw Land
|
|
|
9,472
|
|
1.1
|
%
|
|
|
17,278
|
|
2.1
|
%
|
|
|
20,318
|
|
2.4
|
%
|
|
Other
|
|
|
128,489
|
|
15.2
|
%
|
|
|
136,134
|
|
16.3
|
%
|
|
|
130,547
|
|
15.5
|
%
|
|
Total
commercial real estate loans
|
|
$
|
843,836
|
|
100.0
|
%
|
|
$
|
832,767
|
|
100.0
|
%
|
|
$
|
836,752
|
|
100.0
|
%
|
The total commercial real estate portfolio increased $11.0 million or
1.3% from $832.8 million at December 31, 2011, to $843.8 million at September
30, 2012. At September 30, 2012, loans secured by office buildings and retail
facilities accounted for 34.5% of the commercial real estate portfolio,
relatively unchanged from prior periods shown. The average size of the Bank’s
commercial real estate loans was approximately $.5 million at September 30,
2012.
The composition of the commercial real estate loan portfolio by occupancy
type was as follows:
|
|
|
September 30, 2012
|
|
December 31, 2011
|
|
Change
|
|
September 30, 2011
|
|
|
|
|
|
|
Mix
|
|
|
|
|
Mix
|
|
|
|
|
|
Mix
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Owner occupied
|
|
$
|
360,640
|
|
43
|
%
|
|
$
|
390,589
|
|
47
|
%
|
|
$
|
(29,949
|
)
|
|
-4
|
%
|
|
$
|
394,563
|
|
47
|
%
|
|
Non-owner occupied
|
|
|
483,196
|
|
57
|
%
|
|
|
442,178
|
|
53
|
%
|
|
|
41,018
|
|
|
4
|
%
|
|
|
442,189
|
|
53
|
%
|
|
Total commercial real
estate loans
|
|
$
|
843,836
|
|
100
|
%
|
|
$
|
832,767
|
|
100
|
%
|
|
$
|
11,069
|
|
|
|
|
|
$
|
836,752
|
|
100
|
%
|
Over the periods shown above, the balance of owner occupied commercial
real estate loans has declined while that of non-owner occupied has increased.
At September 30, 2012, the Bank’s commercial real estate concentration, at 128%
relative to Tier 1 capital and allowance for credit losses, was well within the
Interagency Guidelines for Real Estate Lending and the Commercial Real Estate
Lending Joint Guidance policy guidelines which set forth a 300% limit for such
ratio.
- 44 -
The following
table shows the distribution of the commercial real estate portfolio at
September 30, 2012.
|
(Dollars in thousands)
|
|
September 30, 2012
|
|
|
|
|
|
|
Number of
|
|
Percent of
|
|
Region
|
|
Amount
|
|
loans
|
|
total
|
|
Portland-Beaverton, Oregon
/ Vancouver, Washington
|
|
$
|
421,849
|
|
697
|
|
50
|
%
|
|
Salem, Oregon
|
|
|
168,010
|
|
366
|
|
20
|
%
|
|
Oregon non-metropolitan
area
|
|
|
53,955
|
|
150
|
|
6
|
%
|
|
Seattle-Tacoma-Bellevue,
Washington
|
|
|
35,279
|
|
47
|
|
4
|
%
|
|
Olympia,
Washington
|
|
|
31,161
|
|
73
|
|
4
|
%
|
|
Washington non-metropolitan area
|
|
|
29,142
|
|
99
|
|
3
|
%
|
|
Bend, Oregon
|
|
|
24,004
|
|
23
|
|
3
|
%
|
|
Other
|
|
|
80,436
|
|
123
|
|
10
|
%
|
|
Total commercial real
estate loans
|
|
$
|
843,836
|
|
1,578
|
|
100
|
%
|
The following table shows the commercial real estate portfolio by year of
stated maturity:
|
|
|
September 30, 2012
|
|
|
|
|
|
|
Number of
|
|
Percent of
|
|
(Dollars in thousands)
|
|
Amount
|
|
loans
|
|
total
|
|
2012
|
|
$
|
22,668
|
|
32
|
|
2.7
|
%
|
|
2013
|
|
|
50,007
|
|
99
|
|
5.9
|
%
|
|
2014 & After
|
|
|
771,161
|
|
1,447
|
|
91.4
|
%
|
|
Total
commercial real estate loans
|
|
$
|
843,836
|
|
1,578
|
|
100.0
|
%
|
At September 30, 2012, commercial real estate loans with stated loan
maturities in 2012 and 2013 totaled $72.7 million or a relatively modest 8.6% of
the $843.8 million total commercial real estate portfolio. While qualified
commercial real estate borrowers may be incented to refinance such loans given
the low interest rate environment, commercial real estate markets also continue
to be vulnerable to financial and valuation pressures that may limit refinance
options for certain borrowers and negatively impact their ability to perform
under existing loan agreements. Declining values of commercial real estate or
higher market interest rates may also have an adverse effect on the ability of
borrowers with maturing loans to satisfy loan to value ratios required to renew
such loans.
- 45 -
Nonperforming Assets, Troubled Debt
Restructurings, OREO and Delinquencies
Nonperforming Assets.
Nonperforming
assets consist of nonaccrual loans, loans past due more than 90 days and still
accruing interest and OREO. The following table presents information with
respect to total nonaccrual loans by category and OREO for the quarterly periods
presented:
|
|
|
September 30, 2012
|
|
June 30, 2012
|
|
March 31, 2012
|
|
December 31, 2011
|
|
September 30, 2011
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
category
|
|
Amount
|
|
Amount
|
|
Amount
|
|
Amount
|
|
Commercial loans
|
|
$
|
6,643
|
|
|
2.3
|
%
|
|
$
|
6,199
|
|
|
$
|
6,482
|
|
|
$
|
7,750
|
|
|
$
|
9,987
|
|
|
Real estate construction loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
construction
|
|
|
1,650
|
|
|
4.2
|
%
|
|
|
3,750
|
|
|
|
3,749
|
|
|
|
3,750
|
|
|
|
3,886
|
|
|
Residential real estate construction
|
|
|
1,851
|
|
|
22.3
|
%
|
|
|
1,936
|
|
|
|
1,981
|
|
|
|
2,073
|
|
|
|
3,311
|
|
|
Total real estate
construction loans
|
|
|
3,501
|
|
|
7.4
|
%
|
|
|
5,686
|
|
|
|
5,730
|
|
|
|
5,823
|
|
|
|
7,197
|
|
|
Real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
6,170
|
|
|
10.9
|
%
|
|
|
7,044
|
|
|
|
10,744
|
|
|
|
9,624
|
|
|
|
10,877
|
|
|
Home
equity loans and lines of credit
|
|
|
2,845
|
|
|
1.2
|
%
|
|
|
2,239
|
|
|
|
2,528
|
|
|
|
2,325
|
|
|
|
3,285
|
|
|
Total real estate mortgage
loans
|
|
|
9,015
|
|
|
3.0
|
%
|
|
|
9,283
|
|
|
|
13,272
|
|
|
|
11,949
|
|
|
|
14,162
|
|
|
Commercial real estate loans
|
|
|
13,248
|
|
|
1.6
|
%
|
|
|
12,384
|
|
|
|
16,648
|
|
|
|
15,070
|
|
|
|
21,513
|
|
|
Installment and other
consumer loans
|
|
|
-
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
1
|
|
|
|
5
|
|
|
|
6
|
|
|
Total
nonaccrual loans
|
|
|
32,407
|
|
|
2.2
|
%
|
|
|
33,552
|
|
|
|
42,133
|
|
|
|
40,597
|
|
|
|
52,865
|
|
|
90 day past due and
accruing interest
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
nonperforming loans
|
|
|
32,407
|
|
|
2.2
|
%
|
|
|
33,552
|
|
|
|
42,133
|
|
|
|
40,597
|
|
|
|
52,865
|
|
|
Other real estate
owned
|
|
|
21,939
|
|
|
|
|
|
|
25,726
|
|
|
|
27,525
|
|
|
|
30,823
|
|
|
|
30,234
|
|
|
Total nonperforming assets
|
|
$
|
54,346
|
|
|
|
|
|
$
|
59,278
|
|
|
$
|
69,658
|
|
|
$
|
71,420
|
|
|
$
|
83,099
|
|
|
|
|
Nonperforming loans to
total loans
|
|
|
2.17
|
%
|
|
|
|
|
|
2.24
|
%
|
|
|
2.86
|
%
|
|
|
2.70
|
%
|
|
|
3.52
|
%
|
|
Nonperforming assets to total
assets
|
|
|
2.19
|
%
|
|
|
|
|
|
2.46
|
%
|
|
|
2.89
|
%
|
|
|
2.94
|
%
|
|
|
3.30
|
%
|
|
|
|
Delinquent loans 30-89
days past due
|
|
$
|
2,963
|
|
|
|
|
|
$
|
3,422
|
|
|
$
|
4,095
|
|
|
$
|
4,273
|
|
|
$
|
5,556
|
|
|
Delinquent loans to total loans
|
|
|
0.20
|
%
|
|
|
|
|
|
0.23
|
%
|
|
|
0.28
|
%
|
|
|
0.28
|
%
|
|
|
0.37
|
%
|
At September 30, 2012, total
nonperforming assets were $54.3 million, or 2.19% of total assets, compared to
$71.4 million, or 2.94%, at December 31, 2011, and $83.1 million or 3.30% a year
ago.
Total nonaccrual loans of $32.4 million declined $8.2 million or 20% from
year end and $20.5 million or 39% from September 30, 2011. Nonaccrual loans as
of September 30, 2012, declined in every loan category compared to twelve months
earlier.
Troubled Debt Restructurings.
At September 30, 2012, Bancorp had $32.8 million in loans classified as
troubled debt restructurings of which $15.8 million were on an interest accruing
status and $17.0 million on nonaccrual status. Troubled debt restructurings were
$37.6 million at December 31, 2011, of which $15.8 million was on an interest
accruing status and $21.8 million on nonaccrual status. All troubled debt
restructurings were considered impaired at September 30, 2012, and at year end
2011. The modifications granted on troubled debt restructurings were due to
borrower financial difficulty, and generally provide for a modification of loan
terms. For more information regarding 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 the 2011 10-K.
- 46 -
Other Real Estate Owned.
The following table presents activity in the
total OREO portfolio for the periods shown:
|
(Dollars in thousands)
|
|
Total OREO related
activity
|
|
|
|
Amount
|
|
Number
|
|
Full year 2011:
|
|
|
|
|
|
|
|
|
Beginning balance January 1, 2011
|
|
$
|
39,459
|
|
|
402
|
|
|
Additions to
OREO
|
|
|
21,662
|
|
|
74
|
|
|
Valuation adjustments
|
|
|
(4,832
|
)
|
|
-
|
|
|
Disposition of OREO
properties
|
|
|
(25,466
|
)
|
|
(212
|
)
|
|
Ending balance December 31, 2011
|
|
$
|
30,823
|
|
|
264
|
|
|
|
|
First Quarter 2012
|
|
|
|
|
|
|
|
|
Additions to OREO
|
|
$
|
810
|
|
|
9
|
|
|
Valuation
adjustments
|
|
|
(521
|
)
|
|
-
|
|
|
Disposition of OREO properties
|
|
|
(3,587
|
)
|
|
(27
|
)
|
|
Ending balance March 31,
2012
|
|
$
|
27,525
|
|
|
246
|
|
|
|
|
Second Quarter 2012
|
|
|
|
|
|
|
|
|
Additions to OREO
|
|
$
|
3,304
|
|
|
28
|
|
|
Valuation
adjustments
|
|
|
(1,213
|
)
|
|
-
|
|
|
Disposition of OREO properties
|
|
|
(3,890
|
)
|
|
(30
|
)
|
|
Ending balance June 30,
2012
|
|
$
|
25,726
|
|
|
244
|
|
|
|
|
Third Quarter 2012
|
|
|
|
|
|
|
|
|
Additions to OREO
|
|
$
|
487
|
|
|
3
|
|
|
Valuation
adjustments
|
|
|
(486
|
)
|
|
-
|
|
|
Disposition of OREO properties
|
|
|
(3,788
|
)
|
|
(29
|
)
|
|
Ending balance September
30, 2012
|
|
$
|
21,939
|
|
|
218
|
|
|
|
|
Year to Date 2012
|
|
|
|
|
|
|
|
|
Beginning balance January 1, 2012
|
|
$
|
30,823
|
|
|
264
|
|
|
Additions to
OREO
|
|
|
4,601
|
|
|
40
|
|
|
Valuation adjustments
|
|
|
(2,220
|
)
|
|
-
|
|
|
Disposition of OREO
properties
|
|
|
(11,265
|
)
|
|
(86
|
)
|
|
Ending balance September 30, 2012
|
|
$
|
21,939
|
|
|
218
|
|
During the
third quarter 2012 the Company added $.5 million in OREO property, disposed of
$3.8 million in OREO property, and recorded OREO valuation adjustments of $.5
million. OREO valuation adjustments are recorded as other noninterest income. At
September 30, 2012, the OREO portfolio consisted of 218 properties, which was
valued at $21.9 million and reflected write-downs of 57% from original loan
principal. The largest balances in the OREO portfolio at September 30, 2012,
were attributable to income producing properties, followed by land and homes,
all of which are located within the region in which the Company operates, with
the exception of Bend, Oregon, where it no longer has a branch presence. For
more information regarding the Company’s OREO, see the discussion under the
subheading “OREO” and “Critical Accounting Policies” included in Item 7 of the
Company’s 2011 10-K.
The following table presents segments of the OREO portfolio for the
periods shown:
|
(Dollars in thousands)
|
|
September 30,
|
|
# of
|
|
June 30,
|
|
# of
|
|
March 31,
|
|
# of
|
|
|
|
2012
|
|
properties
|
|
2012
|
|
properties
|
|
2012
|
|
properties
|
|
Income producing
properties
|
|
$
|
7,749
|
|
11
|
|
$
|
8,106
|
|
13
|
|
$
|
9,352
|
|
15
|
|
Land
|
|
|
4,104
|
|
13
|
|
|
4,780
|
|
15
|
|
|
4,710
|
|
14
|
|
Homes
|
|
|
3,518
|
|
14
|
|
|
5,539
|
|
20
|
|
|
5,228
|
|
16
|
|
Residential site developments
|
|
|
2,736
|
|
114
|
|
|
3,104
|
|
126
|
|
|
3,367
|
|
136
|
|
Lots
|
|
|
1,912
|
|
40
|
|
|
1,999
|
|
42
|
|
|
2,453
|
|
49
|
|
Multifamily
|
|
|
1,570
|
|
20
|
|
|
1,570
|
|
20
|
|
|
408
|
|
4
|
|
Commercial site
developments
|
|
|
350
|
|
6
|
|
|
303
|
|
6
|
|
|
366
|
|
6
|
|
Condominiums
|
|
|
-
|
|
-
|
|
|
325
|
|
2
|
|
|
1,641
|
|
6
|
|
Total
|
|
$
|
21,939
|
|
218
|
|
$
|
25,726
|
|
244
|
|
$
|
27,525
|
|
246
|
- 47 -
Expenses from
the acquisition, maintenance and disposition of OREO properties are included in
other noninterest expense in the statements of income. The Bank’s operating
results will be impacted by its ability to dispose of OREO properties at prices
that are in line with current valuation expectations. Further decline in real
estate market values in the Bank’s lending area would lead to additional OREO
valuation adjustments or losses upon final disposal, which would have an adverse
effect on the results of operations.
Delinquencies.
Bancorp also monitors delinquencies,
defined as loan balances 30-89 days past due, not on nonaccrual status, as an
indicator of future nonperforming assets. Total delinquencies were $3.0 million
or .20% of total loans at September 30, 2012, down from $4.3 million or .28% at
December 31, 2011, and $5.6 million or .37% at September 30, 2011.
The following table summarizes total delinquent loan balances by loan
category as of the dates shown:
|
(Dollars in thousands)
|
|
September 30, 2012
|
|
December 31, 2011
|
|
September 30, 2011
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Amount
|
|
loan category
|
|
Amount
|
|
loan category
|
|
Amount
|
|
loan category
|
|
Loans 30-89 days past due,
not on nonaccrual status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,058
|
|
|
0.37
|
%
|
|
$
|
683
|
|
|
0.23
|
%
|
|
$
|
610
|
|
|
0.21
|
%
|
|
Real estate
construction
|
|
|
-
|
|
|
0.00
|
%
|
|
|
-
|
|
|
0.00
|
%
|
|
|
-
|
|
|
0.00
|
%
|
|
Real
estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
1,004
|
|
|
1.98
|
%
|
|
|
1,355
|
|
|
2.03
|
%
|
|
|
455
|
|
|
0.77
|
%
|
|
Nonstandard mortgage product
|
|
|
-
|
|
|
0.00
|
%
|
|
|
-
|
|
|
0.00
|
%
|
|
|
-
|
|
|
0.00
|
%
|
|
Home equity loans and lines of credit
|
|
|
16
|
|
|
0.01
|
%
|
|
|
1,034
|
|
|
0.40
|
%
|
|
|
219
|
|
|
0.08
|
%
|
|
Total
real estate mortgage
|
|
|
1,020
|
|
|
0.34
|
%
|
|
|
2,389
|
|
|
0.74
|
%
|
|
|
674
|
|
|
0.20
|
%
|
|
Commercial real
estate
|
|
|
722
|
|
|
0.09
|
%
|
|
|
1,145
|
|
|
0.14
|
%
|
|
|
4,184
|
|
|
0.50
|
%
|
|
Installment and consumer
|
|
|
163
|
|
|
1.34
|
%
|
|
|
56
|
|
|
0.41
|
%
|
|
|
88
|
|
|
0.64
|
%
|
|
Total loans 30-89 days
past due, not in nonaccrual status
|
|
$
|
2,963
|
|
|
|
|
|
$
|
4,273
|
|
|
|
|
|
$
|
5,556
|
|
|
|
|
|
|
|
Delinquent loans past due
30-89 days to total loans
|
|
|
0.20
|
%
|
|
|
|
|
|
0.28
|
%
|
|
|
|
|
|
0.37
|
%
|
|
|
|
Allowance for Credit Losses and Net
Loan Charge-offs
Allowance for Credit Losses.
An allowance for credit losses has been
established based on management’s best estimate, as of the balance sheet date,
of probable losses inherent in the loan portfolio. For more information
regarding the Company’s allowance for credit losses and net loan charge-offs,
see the discussion under the subheadings “Credit Management”, “Allowance for
Credit Losses and Net Loan Charge-offs” and “Critical Accounting Policies”
included in Item 7 of the Company’s 2011 10-K.
- 48 -
The following
table is a summary of activity in the allowance for credit losses for the
quarterly periods presented:
|
(Dollars in thousands)
|
|
Sep. 30,
|
|
June 30,
|
|
March 31,
|
|
Dec. 31,
|
|
Sep. 30,
|
|
|
|
2012
|
|
2012
|
|
2012
|
|
2011
|
|
2011
|
|
Loans outstanding at end
of period
|
|
$
|
1,490,767
|
|
|
$
|
1,495,797
|
|
|
$
|
1,470,848
|
|
|
$
|
1,501,301
|
|
|
$
|
1,503,624
|
|
|
Average loans outstanding during the
period
|
|
|
1,493,454
|
|
|
|
1,479,226
|
|
|
|
1,482,522
|
|
|
|
1,498,437
|
|
|
|
1,515,091
|
|
|
|
|
Allowance for credit
losses, beginning of period
|
|
|
33,900
|
|
|
|
34,634
|
|
|
|
35,983
|
|
|
|
37,016
|
|
|
|
39,231
|
|
|
Total provision (benefit) for credit
losses
|
|
|
(593
|
)
|
|
|
(492
|
)
|
|
|
89
|
|
|
|
1,499
|
|
|
|
1,132
|
|
|
Loan
charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(203
|
)
|
|
|
(379
|
)
|
|
|
(634
|
)
|
|
|
(710
|
)
|
|
|
(1,462
|
)
|
|
Commercial real estate construction
|
|
|
(150
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(136
|
)
|
|
|
(472
|
)
|
|
Residential real estate construction
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(143
|
)
|
|
|
(95
|
)
|
|
Total real estate
construction
|
|
|
(150
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(279
|
)
|
|
|
(567
|
)
|
|
Mortgage
|
|
|
(130
|
)
|
|
|
(122
|
)
|
|
|
(691
|
)
|
|
|
(191
|
)
|
|
|
(257
|
)
|
|
Home equity lines of credit
|
|
|
(454
|
)
|
|
|
(354
|
)
|
|
|
(548
|
)
|
|
|
(760
|
)
|
|
|
(547
|
)
|
|
Total
real estate mortgage
|
|
|
(584
|
)
|
|
|
(476
|
)
|
|
|
(1,239
|
)
|
|
|
(951
|
)
|
|
|
(804
|
)
|
|
Commercial real
estate
|
|
|
(149
|
)
|
|
|
(549
|
)
|
|
|
(62
|
)
|
|
|
(834
|
)
|
|
|
(800
|
)
|
|
Installment and consumer
|
|
|
(64
|
)
|
|
|
(70
|
)
|
|
|
(191
|
)
|
|
|
(130
|
)
|
|
|
(32
|
)
|
|
Overdraft
|
|
|
(166
|
)
|
|
|
(182
|
)
|
|
|
(228
|
)
|
|
|
(288
|
)
|
|
|
(279
|
)
|
|
Total
loan charge-offs
|
|
|
(1,316
|
)
|
|
|
(1,656
|
)
|
|
|
(2,357
|
)
|
|
|
(3,192
|
)
|
|
|
(3,944
|
)
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
101
|
|
|
|
156
|
|
|
|
639
|
|
|
|
418
|
|
|
|
281
|
|
|
Commercial real estate construction
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
|
|
-
|
|
|
Residential real estate construction
|
|
|
4
|
|
|
|
29
|
|
|
|
2
|
|
|
|
3
|
|
|
|
182
|
|
|
Total real estate
construction
|
|
|
6
|
|
|
|
29
|
|
|
|
2
|
|
|
|
91
|
|
|
|
182
|
|
|
Mortgage
|
|
|
29
|
|
|
|
30
|
|
|
|
157
|
|
|
|
14
|
|
|
|
11
|
|
|
Home equity loans and lines of credit
|
|
|
81
|
|
|
|
18
|
|
|
|
6
|
|
|
|
37
|
|
|
|
31
|
|
|
Total
real estate mortgage
|
|
|
110
|
|
|
|
48
|
|
|
|
163
|
|
|
|
51
|
|
|
|
42
|
|
|
Commercial real
estate
|
|
|
23
|
|
|
|
1,129
|
|
|
|
21
|
|
|
|
22
|
|
|
|
21
|
|
|
Installment and consumer
|
|
|
16
|
|
|
|
13
|
|
|
|
26
|
|
|
|
11
|
|
|
|
26
|
|
|
Overdraft
|
|
|
41
|
|
|
|
39
|
|
|
|
68
|
|
|
|
67
|
|
|
|
45
|
|
|
Total
recoveries
|
|
|
297
|
|
|
|
1,414
|
|
|
|
919
|
|
|
|
660
|
|
|
|
597
|
|
|
Net loan
charge-offs
|
|
|
(1,019
|
)
|
|
|
(242
|
)
|
|
|
(1,438
|
)
|
|
|
(2,532
|
)
|
|
|
(3,347
|
)
|
|
Allowance for credit losses, end of
period
|
|
$
|
32,288
|
|
|
$
|
33,900
|
|
|
$
|
34,634
|
|
|
$
|
35,983
|
|
|
$
|
37,016
|
|
|
|
|
Components of allowance
for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
31,457
|
|
|
$
|
33,132
|
|
|
$
|
33,854
|
|
|
$
|
35,212
|
|
|
$
|
36,314
|
|
|
Reserve for unfunded
commitments
|
|
|
831
|
|
|
|
768
|
|
|
|
780
|
|
|
|
771
|
|
|
|
702
|
|
|
Total
allowance for credit losses
|
|
$
|
32,288
|
|
|
$
|
33,900
|
|
|
$
|
34,634
|
|
|
$
|
35,983
|
|
|
$
|
37,016
|
|
|
|
|
Net loan charge-offs to
average loans annualized
|
|
|
0.27
|
%
|
|
|
0.07
|
%
|
|
|
0.39
|
%
|
|
|
0.67
|
%
|
|
|
0.88
|
%
|
|
|
|
Allowance for loan losses
to total loans
|
|
|
2.11
|
%
|
|
|
2.22
|
%
|
|
|
2.30
|
%
|
|
|
2.35
|
%
|
|
|
2.42
|
%
|
|
Allowance for credit losses to total
loans
|
|
|
2.17
|
%
|
|
|
2.27
|
%
|
|
|
2.35
|
%
|
|
|
2.40
|
%
|
|
|
2.46
|
%
|
|
|
|
Allowance for loan losses
to nonperforming loans
|
|
|
97
|
%
|
|
|
99
|
%
|
|
|
80
|
%
|
|
|
87
|
%
|
|
|
69
|
%
|
|
Allowance for credit losses to nonperforming
loans
|
|
|
100
|
%
|
|
|
101
|
%
|
|
|
82
|
%
|
|
|
89
|
%
|
|
|
70
|
%
|
- 49 -
At September
30, 2012, the Company’s allowance for credit losses was $32.3 million,
consisting of a $27.0 million formula allowance, a $3.8 million unallocated
allowance, a $.7 million specific allowance and a $.8 million reserve for
unfunded commitments. At December 31, 2011, the Company’s allowance for credit
losses was $36.0 million, consisting of a $30.3 million formula allowance, a
$4.4 million unallocated allowance, a $.5 million specific allowance and a $.8
million reserve for unfunded commitments. The reduction in provision for credit
losses in the third quarter 2012, compared to the same quarter of 2011, reflects
an overall improving risk profile of the loan portfolio, as evidenced by
charge-off activity, low delinquency, and a positive risk rating migration. The
level of net loan charge-offs in the year to date 2012 was heavily influenced by
a recovery of $1.1 million related to a commercial real estate loan in the
second quarter of 2012. At September 30, 2012, the allowance for credit losses
was 2.17% of total loans, a decrease from 2.40% at December 31, 2011. At
September 30, 2012, the allowance for credit losses was 100% of nonperforming
loans, as compared to 89% at December 31, 2011, and 70% twelve months
earlier.
Overall, the Company believes that the allowance for credit losses is
adequate to absorb probable losses in the loan portfolio at September 30, 2012,
although there can be no assurance that future loan losses will not exceed
current estimates. The process for determining the adequacy of the allowance for
credit losses is critical to the Company’s financial results. Please see Item 1A
“Risk Factors” in the Company’s 2011 10-K.
Net Loan Charge-offs.
For
the quarter ended September 30, 2012, total net loan charge-offs were $1.0
million, down from $3.3 million in the third quarter of 2011. Year-over-year
third quarter, net loan charge-offs declined across nearly every category. Third
quarter 2012 annualized net loan charge-offs to total average loans outstanding
was 0.27%, down from 0.88% in the same quarter last year and up from 0.07% in
the previous quarter.
Deposits and Borrowings
The following table summarizes the quarterly average dollar amount in,
and the interest rate paid on, each of the deposit and borrowing categories
during the third quarters of 2012 and 2011 and second quarter 2012:
|
|
|
Third Quarter
2012
|
|
Second Quarter
2012
|
|
Third Quarter
2011
|
|
|
|
Quarterly Average
|
|
Percent
|
|
Rate
|
|
Quarterly Average
|
|
Percent
|
|
Rate
|
|
Quarterly Average
|
|
Percent
|
|
Rate
|
|
(Dollars in thousands)
|
|
Balance
|
|
of
total
|
|
Paid
|
|
Balance
|
|
of
total
|
|
Paid
|
|
Balance
|
|
of
total
|
|
Paid
|
|
Non-interest bearing demand
|
|
$
|
677,646
|
|
35.5
|
%
|
|
-
|
|
|
$
|
621,547
|
|
33.2
|
%
|
|
-
|
|
|
$
|
615,956
|
|
31.5
|
%
|
|
-
|
|
|
Interest bearing demand
|
|
|
365,560
|
|
19.2
|
%
|
|
0.04
|
%
|
|
|
374,579
|
|
20.0
|
%
|
|
0.04
|
%
|
|
|
363,554
|
|
18.6
|
%
|
|
0.05
|
%
|
|
Savings
|
|
|
132,839
|
|
7.0
|
%
|
|
0.05
|
%
|
|
|
127,930
|
|
6.8
|
%
|
|
0.05
|
%
|
|
|
114,779
|
|
5.9
|
%
|
|
0.09
|
%
|
|
Money market
|
|
|
592,363
|
|
31.0
|
%
|
|
0.09
|
%
|
|
|
596,949
|
|
31.9
|
%
|
|
0.09
|
%
|
|
|
661,871
|
|
33.9
|
%
|
|
0.19
|
%
|
|
Time deposits
|
|
|
140,151
|
|
7.3
|
%
|
|
0.57
|
%
|
|
|
151,085
|
|
8.1
|
%
|
|
0.66
|
%
|
|
|
196,807
|
|
10.1
|
%
|
|
1.20
|
%
|
|
Total deposits
|
|
|
1,908,559
|
|
100.0
|
%
|
|
0.08
|
%
|
|
|
1,872,090
|
|
100.0
|
%
|
|
0.09
|
%
|
|
|
1,952,967
|
|
100.0
|
%
|
|
0.20
|
%
|
|
|
|
Short-term borrowings
1
|
|
|
17,989
|
|
|
|
|
0.81
|
%
|
|
|
3,143
|
|
|
|
|
0.51
|
%
|
|
|
39,926
|
|
|
|
|
9.33
|
%
|
|
Long-term borrowings
1 2
|
|
|
161,074
|
|
|
|
|
1.14
|
%
|
|
|
175,098
|
|
|
|
|
1.44
|
%
|
|
|
180,428
|
|
|
|
|
7.60
|
%
|
|
Total
borrowings
|
|
|
179,063
|
|
|
|
|
1.45
|
%
|
|
|
178,241
|
|
|
|
|
1.44
|
%
|
|
|
220,354
|
|
|
|
|
7.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and borrowings
|
|
$
|
2,087,622
|
|
|
|
|
0.29
|
%
|
|
$
|
2,050,331
|
|
|
|
|
0.30
|
%
|
|
$
|
2,173,321
|
|
|
|
|
1.37
|
%
|
|
1
|
Includes $2.8 million prepayment
fee in connections with prepaying $88.3 million in FHLB borrowings in the
third quarter 2011.
|
|
2
|
Long-term borrowings include
junior subordinated debentures.
|
Third quarter
2012 average total deposits of $1.91 billion declined 2%, or $44.4 million from
the same quarter in 2011. This decrease was due to reductions in money market
deposits and higher cost time deposit balances, which declined $69.5 million and
$56.7 million, respectively, from the same quarter last year. Time deposits
represented just 7% of the Bank’s average total deposits in the most recent
quarter, a decline from 10% in the third quarter of 2011. The combination of the
Bank’s favorable shift in deposit mix and deposit pricing strategies helped
reduce the average rate paid on total deposits to 0.08% in third quarter 2012, a
decline of 12 basis points from 0.20% in the same quarter of 2011 and a decline
of one basis point from .09% in the second quarter of 2012. Whether the Company
will continue to be successful maintaining its low cost deposit base will depend
on various factors, including deposit pricing strategies, market interest rates,
the effects of competition, client behavior, and the impact of regulatory
changes and requirements.
At September 30, 2012, the Bank did not hold any brokered deposits as
compared to $6.0 million at December 31, 2011, and $7.3 million at September 30,
2011. Brokered deposits were not replaced as they matured.
The average balance of long-term borrowings decreased $19.4 million to
$161.1 million in the quarter ended September 30, 2012, compared to the same
period last year. In the second half of 2011, the Company elected to prepay its
FHLB term borrowings of $169 million and to enter into $120 million in new term
borrowings with the FHLB in conjunction with managing its interest rate
sensitivity position. The rate on the new term borrowings is 1.05%, a reduction
from 3.17% on the amount prepaid.
At September 30, 2012, the balance of junior subordinated debentures
issued in connection with the Company’s prior issuances of trust preferred
securities was $51.0 million or unchanged from September 30, 2011. Bancorp has
no deferred interest on its outstanding debentures.
- 50 -
Capital Resources
The Board
of Governors of the Federal Reserve System (“Federal Reserve”) and the FDIC have
established minimum requirements for capital adequacy for bank holding companies
and state non-member banks. For more information on these topics, see the
discussions under the subheadings “Capital Adequacy Requirements” in the section
“Supervision and Regulation” included in Item 1 of the Company’s 2011 10-K. The
following table summarizes the capital measures of Bancorp and the Bank for the
periods shown:
|
|
|
West Coast Bancorp
|
|
|
West Coast Bank
|
|
Minimum requirements
|
|
(Dollars in thousands)
|
|
September 30,
|
|
December 31,
|
|
|
September 30,
|
|
December 31,
|
|
Adequately
|
|
Well
|
|
|
|
2012
|
|
2011
|
|
2011
|
|
|
2012
|
|
2011
|
|
2011
|
|
Capitalized
|
|
Capitalized
|
|
Tier 1 risk-based capital
ratio
|
|
|
20.45
|
%
|
|
|
18.43
|
%
|
|
|
19.36
|
%
|
|
|
|
19.80
|
%
|
|
|
17.74
|
%
|
|
|
18.66
|
%
|
|
4.00
|
%
|
|
6.00
|
%
|
|
Total risk-based capital ratio
|
|
|
21.62
|
%
|
|
|
19.69
|
%
|
|
|
20.62
|
%
|
|
|
|
21.06
|
%
|
|
|
19.00
|
%
|
|
|
19.92
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
|
Leverage ratio
|
|
|
15.48
|
%
|
|
|
13.72
|
%
|
|
|
14.61
|
%
|
|
|
|
15.00
|
%
|
|
|
13.20
|
%
|
|
|
14.09
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders'
equity
|
|
$
|
335,996
|
|
|
$
|
296,867
|
|
|
$
|
314,479
|
|
|
|
$
|
374,769
|
|
|
$
|
334,746
|
|
|
$
|
352,187
|
|
|
|
|
|
|
|
Bancorp’s total risk-based capital
ratio increased to 21.62% at September 30, 2012, from 20.62% at December 31,
2011, and 19.69% at September 30, 2011, while Bancorp's Tier 1 risk-based
capital ratio increased to 20.45% at the most recent quarter end, from 19.36% at
year end 2011 and 18.43% at September 30, 2011. The increases in capital ratios
were primarily due to the Company’s continued profitability. Also, the
year-over-year increases in the capital ratios were positively impacted by the
effect of fully reversing the Company’s deferred tax asset valuation allowance
in the fourth quarter of 2011. The total risk-based capital ratio at the Bank
improved to 21.06% at September 30, 2012, from 19.92% at year end 2011, and
19.00% at September 30, 2011, while the Bank’s Tier 1 risk-based capital ratio
increased to 19.80% from 18.66% and 17.74% as of the same respective dates.
Additionally, the leverage ratio at the Bank improved to 15.00% at September 30,
2012, from 14.09% at year end 2011, and 13.20% a year ago.
The total risk based
capital ratios of Bancorp include $51.0 million of junior subordinated
debentures which qualified as Tier 1 capital at September 30, 2012, under
guidance issued by the Federal Reserve. The Company will monitor the
finalization of the Basel III Capital Rules, including whether its junior
subordinated debentures will continue to qualify for Tier 1 capital under the
final rules.
Bancorp’s stockholders’ equity was
$336.0 million at September 30, 2012, up from $314.5 million at year end 2011
and $296.9 million at September 30, 2011.
- 51 -
Liquidity and Sources of
Funds
The
Bank’s sources of funds include customer deposits, loan repayments, borrowings
from the FHLB, maturities of investment securities, sales of “Available for
Sale” securities, loan and OREO sales, net income, and loans taken out at the
Reserve Bank discount window. Scheduled loan repayments are a relatively stable
source of funds, while deposit inflows, unscheduled loan prepayments, and loan
and OREO sales are not. Deposit inflows, sales of securities, loan and OREO
properties, and unscheduled loan prepayments may, amongst other factors, be
influenced by general interest rate levels, interest rates available on other
investments, competition, market and general economic conditions.
Deposits are the Bank’s primary
source of funds, and at September 30, 2012, its loan to deposit ratio was 77%,
relatively unchanged from December 31, 2011, and September 30, 2011. Declining
loan balances over the past few years caused the collective balance of interest
bearing deposits and investment securities portfolio of $841.0 million to
account for a significant 36% of total earning assets at September 30, 2012. In
light of the Bank’s substantial liquidity position it continued to reduce
brokered and other time deposits during the most recent quarter.
The following table summarizes the
Bank’s primary liquidity, on-balance sheet liquidity, and net non-core funding
dependency ratios. The primary liquidity ratio represents the sum of net cash
and short-term, marketable assets and available borrowing lines divided by total
deposits. The on-balance sheet liquidity ratio consists of the sum of net cash, short-term and
marketable assets divided by total deposits. The net non-core funding dependency
ratio is non-core liabilities less short-term investments divided by long-term
assets.
T
he Bank’s
primary liquidity, on-balance sheet liquidity, and net non-core funding
dependency ratios remained strong at quarter end:
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
Primary
liquidity
|
|
48
|
%
|
|
45
|
%
|
|
On-balance sheet liquidity
|
|
29
|
%
|
|
26
|
%
|
|
Net non-core funding
dependency
|
|
5
|
%
|
|
6
|
%
|
At September 30, 2012, the Bank had
outstanding borrowings of $127.9 million, against its $455.0 million in
established borrowing capacity with the FHLB, as compared to $120.0 million
outstanding against its $440.4 million in established borrowing capacity at
December 31, 2011. The borrowing capacity at the FHLB increased from year end as
the FHLB increased the amount they are willing to lend against the Bank’s
commercial real estate loan collateral. The Bank’s borrowing facility is subject
to collateral and stock ownership requirements. The Bank also had an available
discount window primary credit line with the Reserve Bank of approximately $42.2
million at September 30, 2012, with no balance outstanding at either September
30, 2012, or December 31, 2011. The Reserve Bank line is subject to collateral
requirements.
On October 6, 2010, the Bank entered
into a Memorandum of Understanding with the FDIC and DFCS under which the Bank
may not pay dividends to the holding company without the consent of the FDIC and
the DFCS. At September 30, 2012, the holding company did not have any borrowing
arrangements of its own.
Off-Balance Sheet Arrangements
At September 30, 2012, the Bank had
commitments to extend credit of $561.4 million, which was down 2.3% compared to
$574.3 million at December 31, 2011. For additional information regarding off
balance sheet arrangements and future financial commitments, see Note 8
“Commitments and Contingent Liabilities” in the financial statements included
under Item 1 of this report.
Critical Accounting Policies
Management has identified as the
Company’s most critical accounting policies, the calculation of its allowance
for credit losses, valuation of OREO, and estimates relating to income taxes.
Each of these policies are discussed in the Company’s 2011 10-K under the
heading “Management’s Discussion and Analysis of Financial Condition and Results
of Operation – Critical Accounting Policies.”
- 52 -