Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
[ ] Large Accelerated Filer [ X ] Accelerated Filer [ ] Non-accelerated Filer [ ] Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value: 96,415,607 shares outstanding as of March 31, 2011
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
1. BASIS OF PRESENTATION
The interim unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America for interim financial information. In addition, this report has been prepared in accordance with the instructions for Form 10-Q, and therefore, these financial statements do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The accompanying interim consolidated financial statements include the accounts of West Coast Bancorp (“Bancorp” or the “Company”), and its wholly-owned subsidiaries, West Coast Bank (the “Bank”), West Coast Trust Company, Inc and Totten, Inc., after elimination of intercompany transactions and balances. The Company’s interim consolidated financial statements and related notes should be read in conjunction with the audited financial statements and related notes, including our significant accounting policies, contained in the Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 10-K”).
2. STOCK PLANS
At March 31, 2011, Bancorp maintained two stock plans; the 2002 Stock Incentive Plan (“2002 Plan”) and the 1999 Stock Option Plan (“1999 Plan”). No additional grants may be made under the 1999 Plan. The 2002 Plan, which is shareholder approved, permits the grant of stock options, restricted stock and certain other stock based awards. On April 27, 2010, shareholders approved a 2.0 million share increase in the shares available under the 2002 Plan. The 2002 Plan permits the grant of stock options and restricted stock awards for up to 4.1 million shares, of which 514,217 shares remained available for issuance, of which 475,309 shares may be allocated to restricted stock awards as of March 31, 2011. It is Bancorp’s policy to issue new shares for stock option exercises and restricted stock. Bancorp expenses stock options and restricted stock on a straight line basis over the applicable vesting term.
The following table presents information on stock options outstanding for the periods shown, less estimated forfeitures:
2. STOCK PLANS (continued)
The following table presents information on restricted stock outstanding for the period shown:
3. INVESTMENT SECURITIES
The following tables present the available for sale investment portfolio as of March 31, 2011, and December 31, 2010:
| (Dollars in thousands) | | | | | | | | | | | | | |
| March 31, 2011 | | Amortized | | Unrealized | | Unrealized | | | |
| | | Cost | | Gross Gains | | Gross Losses | | Fair Value |
| U.S. Treasury securities | | $ | 4,259 | | $ | 23 | | $ | - | | | $ | 4,282 |
| U.S. Government agency securities | | | 153,637 | | | 205 | | | (825 | ) | | | 153,017 |
| Corporate securities | | | 14,514 | | | - | | | (4,664 | ) | | | 9,850 |
| Mortgage-backed securities | | | 403,707 | | | 4,638 | | | (2,605 | ) | | | 405,740 |
| Obligations of state and political subdivisions | | | 57,305 | | | 1,990 | | | (159 | ) | | | 59,136 |
| Equity investments and other securities | | | 11,397 | | | 326 | | | (43 | ) | | | 11,680 |
| Total | | $ | 644,819 | | $ | 7,182 | | $ | (8,296 | ) | | $ | 643,705 |
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | | | | |
| December 31, 2010 | | Amortized | | Unrealized | | Unrealized | | | |
| | | Cost | | Gross Gains | | Gross Losses | | Fair Value |
| U.S. Treasury securities | | $ | 14,347 | | $ | 45 | | $ | - | | | $ | 14,392 |
| U.S. Government agency securities | | | 193,901 | | | 836 | | | (507 | ) | | | 194,230 |
| Corporate securities | | | 14,499 | | | - | | | (5,107 | ) | | | 9,392 |
| Mortgage-backed securities | | | 359,965 | | | 5,853 | | | (2,200 | ) | | | 363,618 |
| Obligations of state and political subdivisions | | | 51,111 | | | 1,789 | | | (255 | ) | | | 52,645 |
| Equity investments and other securities | | | 11,423 | | | 437 | | | (25 | ) | | | 11,835 |
| Total | | $ | 645,246 | | $ | 8,960 | | $ | (8,094 | ) | | $ | 646,112 |
| | | | | | | | | | | | | | |
At March 31, 2011, the fair value of the securities in the investment portfolio was $643.7 million while the amortized cost was $644.8 million, reflecting a net unrealized loss in the portfolio of $1.1 million. At December 31, 2010, the fair value and amortized cost of securities in the investment portfolio were $646.1 million and $645.2 million, respectively, reflecting a net unrealized gain of $.9 million.
The corporate securities segment of the investment securities portfolio had a $4.7 million net unrealized loss at March 31, 2011. The unrealized loss was associated with the decline in market value of our four investments in pooled trust preferred securities issued primarily by banks and insurance companies. An increase in liquidity and credit spreads, including certain issuer defaults, and an extension of expected cash flows, including issuer elections to defer interest payments, since the purchase of these securities contributed to the unrealized loss associated with these securities at March 31, 2011. Collectively they had an amortized cost of $14.0 million and a $9.3 million estimated fair value at March 31, 2011. Compared to December 31, 2010, the estimated market value of these securities increased slightly due to a small decrease in expected duration of cash flows. These securities have several features that reduce credit risk, including seniority over certain tranches in the same pool and the benefit of certain collateral coverage tests. Based on our current estimates of the future default rates for the underlying collateral, we believe these features are sufficient to protect the Company’s securities from experiencing any credit losses.
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3. INVESTMENT SECURITIES (continued)
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 |
| March 31, 2011 | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| U.S. Government agency securities | | $ | 81,204 | | $ | (825 | ) | | $ | - | | $ | - | | | | 81,204 | | | (825 | ) |
| Corporate securities | | | - | | | - | | | | 9,349 | | | (4,664 | ) | | | 9,349 | | | (4,664 | ) |
| Mortgage-backed securities | | | 166,586 | | | (2,521 | ) | | | 986 | | | (84 | ) | | | 167,572 | | | (2,605 | ) |
| Obligations of state and political subdivisions | | | 8,805 | | | (159 | ) | | | - | | | - | | | | 8,805 | | | (159 | ) |
| Equity and other securities | | | 1,957 | | | (42 | ) | | | 1 | | | (1 | ) | | | 1,958 | | | (43 | ) |
| Total | | $ | 258,552 | | $ | (3,547 | ) | | $ | 10,336 | | $ | (4,749 | ) | | $ | 268,888 | | $ | (8,296 | ) |
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | Less than 12 months | | 12 months or more | | Total |
| | | | | Unrealized | | | | Unrealized | | | | Unrealized |
| December 31, 2010 | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| U.S. Government agency securities | | $ | 40,528 | | $ | (507 | ) | | $ | - | | $ | - | | | $ | 40,528 | | $ | (507 | ) |
| Corporate securities | | | - | | | - | | | | 8,892 | | | (5,107 | ) | | | 8,892 | | | (5,107 | ) |
| Mortgage-backed securities | | | 110,414 | | | (2,088 | ) | | | 978 | | | (112 | ) | | | 111,392 | | | (2,200 | ) |
| Obligations of state and political subdivisions | | | 4,084 | | | (255 | ) | | | - | | | - | | | | 4,084 | | | (255 | ) |
| Equity and other securities | | | 1,776 | | | (24 | ) | | | 1 | | | (1 | ) | | | 1,777 | | | (25 | ) |
| Total | | $ | 156,802 | | $ | (2,874 | ) | | $ | 9,871 | | $ | (5,220 | ) | | $ | 166,673 | | $ | (8,094 | ) |
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | Less than 12 months | | 12 months or more | | Total |
| | | | | Unrealized | | | | | Unrealized | | | | Unrealized |
| As of March 31, 2010 | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| U.S. Government agency securities | | $ | 58,102 | | $ | (277 | ) | | $ | - | | $ | - | | | $ | 58,102 | | $ | (277 | ) |
| Corporate securities | | | - | | | - | | | | 9,731 | | | (4,220 | ) | | | 9,731 | | | (4,220 | ) |
| Mortgage-backed securities | | | 82,278 | | | (495 | ) | | | 5,617 | | | (664 | ) | | | 87,895 | | | (1,159 | ) |
| Obligations of state and political subdivisions | | | 3,080 | | | (48 | ) | | | 1,879 | | | (134 | ) | | | 4,959 | | | (182 | ) |
| Equity and other securities | | | 1,188 | | | (13 | ) | | | - | | | - | | | | 1,188 | | | (13 | ) |
| Total | | $ | 144,648 | | $ | (833 | ) | | $ | 17,227 | | $ | (5,018 | ) | | $ | 161,875 | | $ | (5,851 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
At March 31, 2011, the Company had six investment securities with an amortized cost of $15.1 million and an unrealized loss of $4.8 million that have been in a continuous unrealized loss position for more than 12 months. Pooled trust preferred securities accounted for $4.7 million of the unrealized loss in these securities.
There were a total of 36 securities in Bancorp’s investment portfolio with an amortized cost of $262.1 million and a total unrealized loss of $3.5 million at March 31, 2011, that have been in a continuous unrealized loss position for less than 12 months. The unrealized loss on these investment securities was predominantly caused by changes in market interest rates, average life or credit spreads subsequent to purchase. The fair value of most of our securities fluctuates as market interest rates change.
Based on management’s review and evaluation of the Company’s debt securities, the debt securities with unrealized losses were not considered to have other-than-temporary impairment (“OTTI”). The Company does not intend to sell any debt securities which have an unrealized loss, it is unlikely the Company will be required to sell these securities before recovery, and we expect to recover the entire amortized cost of these impaired securities.
At March 31, 2011, and December 31, 2010, the Company had $340.2 and $504.0 million, respectively, in investment securities being provided as collateral to the Federal Home Loan Bank of Seattle (“FHLB”), the Federal Reserve Bank of San Francisco (“Reserve Bank”), the State of Oregon and the State of Washington, and others for our borrowings and certain public fund deposits. At March 31, 2011, and December 31, 2010, Bancorp had no reverse repurchase agreements.
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3. INVESTMENT SECURITIES (continued)
The following table presents the contractual maturities of the investment securities available for sale at March 31, 2011:
| (Dollars in thousands) | | Available for sale |
| March 31, 2011 | | Amortized cost | | Fair value |
| U.S. Treasury securities | | | | | | |
One year or less | | $ | 4,059 | | $ | 4,073 |
After one year through five years | | | 200 | | | 209 |
After five through ten years | | | - | | | - |
Due after ten years | | | - | | | - |
| Total | | | 4,259 | | | 4,282 |
| | | | | | | |
| U.S. Government agency securities: | | | | | | |
One year or less | | | - | | | - |
After one year through five years | | | 123,385 | | | 123,131 |
After five through ten years | | | 30,252 | | | 29,886 |
Due after ten years | | | - | | | - |
| Total | | | 153,637 | | | 153,017 |
| | | | | | | |
| Corporate securities: | | | | | | |
One year or less | | | - | | | - |
After one year through five years | | | 500 | | | 500 |
After five through ten years | | | - | | | - |
Due after ten years | | | 14,014 | | | 9,350 |
| Total | | | 14,514 | | | 9,850 |
| | | | | | | |
| Obligations of state and political subdivisions: | | | | | | |
One year or less | | | 6,636 | | | 6,711 |
After one year through five years | | | 10,911 | | | 11,551 |
After five through ten years | | | 30,022 | | | 31,121 |
Due after ten years | | | 9,736 | | | 9,753 |
| Total | | | 57,305 | | | 59,136 |
| | | | | | | |
| Sub-total | | | 229,715 | | | 226,285 |
| | | | | | | |
| Mortgage-backed securities | | | 403,707 | | | 405,740 |
| Equity investments and other securities | | | 11,397 | | | 11,680 |
| Total securities | | $ | 644,819 | | $ | 643,705 |
| | | | | | | |
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.
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4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition and carrying value of the Company’s loan portfolio, excluding loans held for sale, is as follows:
| (Dollars in thousands) | | March 31, 2011 | | December 31, 2010 |
| Commercial | | $ | 306,864 | | | $ | 309,327 | |
| Real estate construction | | | 37,607 | | | | 44,085 | |
| Real estate mortgage | | | 341,526 | | | | 349,016 | |
| Commercial real estate | | | 834,880 | | | | 818,577 | |
| Installment and other consumer | | | 14,823 | | | | 15,265 | |
| Total loans | | | 1,535,700 | | | | 1,536,270 | |
| Allowance for loan losses | | | (39,692 | ) | | | (40,217 | ) |
| Total loans, net | | $ | 1,496,008 | | | $ | 1,496,053 | |
| | | | | | | | | |
Loans greater than 90 days past due are classified into nonaccrual status. The following table presents an age analysis of the loan portfolio for the periods shown:
| (Dollars in thousands) | | March 31, 2011 |
| | | 30 - 89 days | | Greater than | | Total | | Current | | Total |
| | | past due | | 90 days past due | | past due | | loans | | loans |
| Commercial | | $ | 1,056 | | $ | 10,670 | | $ | 11,726 | | $ | 295,138 | | $ | 306,864 |
| Real estate construction | | | 2,616 | | | 4,207 | | | 6,823 | | | 30,784 | | | 37,607 |
| Real estate mortgage | | | 6,105 | | | 2,463 | | | 8,568 | | | 332,958 | | | 341,526 |
| Commercial real estate | | | 3,951 | | | 12,172 | | | 16,123 | | | 818,757 | | | 834,880 |
| Installment and other consumer | | | 156 | | | - | | | 156 | | | 14,667 | | | 14,823 |
| Total | | $ | 13,884 | | $ | 29,512 | | $ | 43,396 | | $ | 1,492,304 | | $ | 1,535,700 |
| | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | December 31, 2010 |
| | | 30 - 89 days | | Greater than | | Total | | Current | | Total |
| | | past due | | 90 days past due | | past due | | loans | | loans |
| Commercial | | $ | 953 | | $ | 9,984 | | $ | 10,937 | | $ | 298,390 | | $ | 309,327 |
| Real estate construction | | | 2,098 | | | 4,039 | | | 6,137 | | | 37,948 | | | 44,085 |
| Real estate mortgage | | | 4,662 | | | 5,669 | | | 10,331 | | | 338,685 | | | 349,016 |
| Commercial real estate | | | 3,988 | | | 12,157 | | | 16,145 | | | 802,432 | | | 818,577 |
| Installment and other consumer | | | 53 | | | - | | | 53 | | | 15,212 | | | 15,265 |
| Total | | $ | 11,754 | | $ | 31,849 | | $ | 43,603 | | $ | 1,492,667 | | $ | 1,536,270 |
| | | | | | | | | | | | | | | | |
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4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The following table presents an analysis of impaired loans for the periods shown:
| | | | | | | | | | | | | | | | | | Quarter ended |
| (Dollars in thousands) | | March 31, 2011 | | March 31, 2011 |
| | | Unpaid principal | | Impaired loans | | Impaired loans | | Total impaired | | Related | | Average |
| | | balance1 | | with no allowance | | with allowance | | loan balance | | allowance | | balance |
| Commercial | | $ | 19,898 | | $ | 12,804 | | $ | 170 | | $ | 12,974 | | $ | - | | $ | 14,093 |
| Real estate construction | | | 13,831 | | | 8,125 | | | 1,067 | | $ | 9,192 | | | 5 | | | 9,588 |
| Real estate mortgage | | | 25,761 | | | 13,591 | | | 6,428 | | $ | 20,019 | | | 314 | | | 22,150 |
| Commercial real estate | | | 26,162 | | | 19,423 | | | 5,608 | | $ | 25,031 | | | 92 | | | 26,580 |
| Installment and other consumer | | | 25 | | | - | | | - | | | - | | | - | | | - |
| Total | | $ | 85,677 | | $ | 53,943 | | $ | 13,273 | | $ | 67,216 | | $ | 411 | | $ | 72,411 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Quarter ended |
| (Dollars in thousands) | | December 31, 2010 | | December 31, 2010 |
| | | Unpaid principal | | Impaired loans | | Impaired loans | | Total impaired | | Related | | Average |
| | | balance1 | | with no allowance | | with allowance | | loan balance | | allowance | | balance |
| Commercial | | $ | 22,692 | | $ | 13,377 | | $ | 1,679 | | $ | 15,056 | | $ | 2 | | $ | 19,992 |
| Real estate construction | | | 15,570 | | | 10,692 | | | 323 | | | 11,015 | | | 2 | | | 20,191 |
| Real estate mortgage | | | 28,856 | | | 15,491 | | | 7,828 | | | 23,319 | | | 443 | | | 20,610 |
| Commercial real estate | | | 28,717 | | | 21,648 | | | 5,634 | | | 27,282 | | | 103 | | | 17,187 |
| Installment and other consumer | | | - | | | - | | | - | | | - | | | - | | | 45 |
| Total | | $ | 95,835 | | $ | 61,208 | | $ | 15,464 | | $ | 76,672 | | $ | 550 | | $ | 78,025 |
| | | | | | | | | | | | | | | | | | | |
| 1 | The unpaid principal balance on impaired loans represents the amount owed by the borrower. The carrying value of impaired loans is lower than the unpaid principal balance due to charge-offs. |
The following table presents nonaccrual loans by category as of the dates shown:
| | | March 31, | | December 31, |
| (Dollars in thousands) | | 2011 | | 2010 |
| Commercial | | $ | 12,803 | | $ | 13,377 |
| Real estate construction | | | 8,125 | | | 10,692 |
| Real estate mortgage | | | 13,591 | | | 15,491 |
| Commercial real estate | | | 19,424 | | | 21,671 |
| Installment and other consumer | | | - | | | - |
| Total loans on nonaccrual status | | $ | 53,943 | | $ | 61,231 |
| | | | | | | |
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4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The Company uses a risk rating matrix to assign a risk rating to loans not evaluated on a homogenous pool level. At March 31, 2011, $1.11 billion of loans were risk rated and $425.8 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 been discontinued. By definition under regulatory guidelines, a “Substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business.
- Rating 9 - This rating includes “Doubtful” loans in accordance with regulatory guidelines. Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty.
- Rating 10 - This rating includes “Loss” loans in accordance with regulatory guidelines. Such loans are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.
The Company considers loans assigned a risk rating 8 through 10 to be classified loans. The following table presents weighted average risk ratings of the loan portfolio and classified loans by category. The weighted average risk ratings did not exhibit material change from December 31, 2010, to March 31, 2011. Overall classified loans remained virtually unchanged from December 31, 2010, both in total and as a percentage of the loan portfolio. Total commercial real estate classified loans increased during 2010; as such portfolio typically is challenged in the latter part of a weak economic period.
| (Dollars in thousands) | | March 31, 2011 | | December 31, 2010 |
| | | Weighted average | | Classified | | Weighted average | | Classified |
| | | risk rating | | loans | | risk rating | | loans |
| Commercial | | | 5.95 | | $ | 31,350 | | | 5.89 | | $ | 32,895 |
| Real estate construction | | | 7.37 | | | 21,633 | | | 7.33 | | | 24,131 |
| Real estate mortgage | | | 6.45 | | | 25,579 | | | 6.34 | | | 20,913 |
| Commercial real estate | | | 5.72 | | | 40,709 | | | 5.75 | | | 42,045 |
| Installment and other consumer1 | | | 7.42 | | | 137 | | | 7.41 | | | 137 |
| Total | | | | | $ | 119,408 | | | | | $ | 120,121 |
| | | | | | | | | | | | | |
| Total loans risk rated | | $ | 1,109,936 | | | | | $ | 1,096,859 | | | |
| 1 | Installment and other consumer loans are primarily evalued on a homogenous pool level and generally not individually risk rated unless certain factors are met. |
- 16 -
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The following table presents homogeneous loans where credit risk is evaluated on a portfolio basis by category, and includes our home equity lines of credit and certain small business loans. Important credit quality metrics for this portfolio include balances on nonaccrual and past due status. Total loans and lines evaluated on a homogeneous pool basis were $425.8 million at March 31, 2011, and $439.4 million at December 31, 2010. Such balances on nonaccrual status declined from $7.7 million at December 31, 2010, to $3.1 million at March 31, 2011. During the quarter ended March 31, 2011, due to the unique nature of nonstandard mortgages, the methodology for risk rating these loans was modified. This procedural change resulted in the movement of 35 notes with total commitments of $8.5 million from the homogenous pool to the individually risk rated portfolio. This change did not have a significant impact on the allowance for loan losses.
| (Dollars in thousands) | | March 31, 2011 | | December 31, 2010 |
| | | Current | | Nonaccrual | | 30 - 89 days | | Current | | Nonaccrual | | 30 - 89 days |
| | | status | | status | | past due | | status | | status | | past due |
| Commercial | | $ | 52,637 | | $ | 49 | | $ | 566 | | $ | 54,217 | | $ | 245 | | $ | 7 |
| Real estate construction | | | - | | | 796 | | | - | | | - | | | 1,136 | | | - |
| Real estate mortgage | | | 263,814 | | | 995 | | | 833 | | | 269,862 | | | 4,958 | | | 1,931 |
| Commercial real estate | | | 90,268 | | | 1,308 | | | - | | | 90,782 | | | 1,334 | | | 8 |
| Installment and other consumer | | | 14,388 | | | - | | | 156 | | | 14,878 | | | - | | | 52 |
| Total | | $ | 421,107 | | $ | 3,148 | | $ | 1,555 | | $ | 429,739 | | $ | 7,673 | | $ | 1,998 |
| | | | | | | | | | | | | | | | | | | |
The following is an analysis of the changes in the allowance for credit losses:
| (Dollars in thousands) | | Three months ended |
| | | March 31, 2011 | | March 31, 2010 |
| Balance, beginning of period | | $ | 41,067 | | | $ | 39,418 | |
| Provision for credit losses | | | 2,076 | | | | 7,634 | |
| Losses charged to the allowance | | | (3,414 | ) | | | (6,426 | ) |
| Recoveries credited to the allowance | | | 700 | | | | 673 | |
| Balance, end of period | | $ | 40,429 | | | $ | 41,299 | |
| | | | | | | | | |
| Components of allowance for credit losses | | | | | | | | |
| Allowance for loan losses | | $ | 39,692 | | | $ | 40,446 | |
| Reserve for unfunded commitments | | | 737 | | | | 853 | |
| Total allowance for credit losses | | $ | 40,429 | | | $ | 41,299 | |
| | | | | | | | | |
The reserve for unfunded commitments was included in other liabilities as of March 31, 2011 and 2010.
- 17 -
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The following table presents summary account activity relating to the allowance for credit losses by loan category for the periods shown:
| (Dollars in thousands) | | Three months ended March 31, 2011 |
| | | | | | | Real estate | | Real estate | | Commercial | | Installment and | | | | | | | | |
| | | Commercial | | construction | | mortgage | | real estate | | other consumer | | Unallocated | | Total |
| Beginning balance December 31, 2010 | | $ | 8,541 | | | $ | 4,474 | | | $ | 8,156 | | | $ | 12,462 | | | $ | 1,273 | | | $ | 6,161 | | | $ | 41,067 | |
| Provision for credit losses | | | 457 | | | | (109 | ) | | | 1,354 | | | | 654 | | | | 221 | | | | (501 | ) | | | 2,076 | |
| Losses charged to the allowance | | | (761 | ) | | | (376 | ) | | | (1,485 | ) | | | (329 | ) | | | (463 | ) | | | - | | | | (3,414 | ) |
| Recoveries credited to the allowance | | | 498 | | | | - | | | | 112 | | | | 3 | | | | 87 | | | | - | | | | 700 | |
| Ending balance March 31, 2011 | | $ | 8,735 | | | $ | 3,989 | | | $ | 8,137 | | | $ | 12,790 | | | $ | 1,118 | | | $ | 5,660 | | | $ | 40,429 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans valued for impairment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually | | $ | 12,974 | | | $ | 9,192 | | | $ | 20,019 | | | $ | 25,031 | | | $ | - | | | $ | - | | | $ | 67,216 | |
| Collectively | | | 293,890 | | | | 28,415 | | | | 321,507 | | | | 809,849 | | | | 14,823 | | | | - | | | | 1,468,484 | |
| Total | | $ | 306,864 | | | $ | 37,607 | | | $ | 341,526 | | | $ | 834,880 | | | $ | 14,823 | | | $ | - | | | $ | 1,535,700 | |
| | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Twelve months ended December 31, 2010 |
| | | | | | | Real estate | | Real estate | | Commercial | | Installment and | | | | | | | | |
| | | Commercial | | construction | | mortgage | | real estate | | other consumer | | Unallocated | | Total |
| Beginning balance December 31, 2009 | | $ | 8,224 | | | $ | 7,240 | | | $ | 8,211 | | | $ | 9,492 | | | $ | 1,294 | | | $ | 4,957 | | | $ | 39,418 | |
| Provision for credit losses | | | 4,474 | | | | 113 | | | | 7,025 | | | | 4,262 | | | | 1,574 | | | | 1,204 | | | | 18,652 | |
| Losses charged to the allowance | | | (5,229 | ) | | | (3,576 | ) | | | (7,461 | ) | | | (1,321 | ) | | | (1,889 | ) | | | - | | | | (19,476 | ) |
| Recoveries credited to the allowance | | | 1,072 | | | | 697 | | | | 381 | | | | 29 | | | | 294 | | | | - | | | | 2,473 | |
| Ending balance at December 31, 2010 | | $ | 8,541 | | | $ | 4,474 | | | $ | 8,156 | | | $ | 12,462 | | | $ | 1,273 | | | $ | 6,161 | | | $ | 41,067 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans valued for impairment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually | | $ | 15,056 | | | $ | 11,015 | | | $ | 23,319 | | | $ | 27,282 | | | $ | - | | | $ | - | | | $ | 76,672 | |
| Collectively | | | 294,271 | | | | 33,070 | | | | 325,697 | | | | 791,295 | | | | 15,265 | | | | - | | | | 1,459,598 | |
| Total | | $ | 309,327 | | | $ | 44,085 | | | $ | 349,016 | | | $ | 818,577 | | | $ | 15,265 | | | $ | - | | | $ | 1,536,270 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
5. OTHER REAL ESTATE OWNED, NET
The following tables summarize Other Real Estate Owned (“OREO”) for the periods shown:
| (Dollars in thousands) | | Three months ended |
| | | March 31, 2011 | | March 31, 2010 |
| Balance, beginning period | | $ | 39,459 | | | $ | 53,594 | |
| Additions to OREO | | | 6,479 | | | | 5,003 | |
| Disposition of OREO | | | (5,952 | ) | | | (11,000 | ) |
| Valuation adjustments in the period | | | (657 | ) | | | (2,359 | ) |
| Total OREO | | $ | 39,329 | | | $ | 45,238 | |
| | | | | | | | | |
The following tables summarize the OREO valuation allowance for the periods shown:
| (Dollars in thousands) | | Three months ended |
| | | March 31, 2011 | | March 31, 2010 |
| Balance, beginning period | | $ | 7,584 | | | $ | 9,489 | |
| Valuation adjustments in the period | | | 657 | | | | 2,359 | |
| Deductions from the valuation allowance due to disposition | | | (816 | ) | | | (3,845 | ) |
| Total OREO valuation allowance | | $ | 7,425 | | | $ | 8,003 | |
| | | | | | | | | |
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6. EARNINGS (LOSS) PER SHARE
The earnings (loss) per share is calculated under the two-class method. The two-class method is an earnings allocation formula that determines earnings (loss) 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 (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per share is computed in the same manner as basic earnings (loss) 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 non-vested restricted stock were included, unless those additional shares would have been anti-dilutive. For the diluted earnings (loss) 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 quarter ended March 31, 2011.
The following table reconciles the numerator and denominator of the basic and diluted earnings (loss) per share computations for the quarters ended March 31, 2011, and 2010:
| (Dollars and shares in thousands, except per share amounts) | | Three months ended |
| | | March 31, 2011 | | March 31, 2010 |
| Net income (loss) | | $ | 5,105 | | $ | (888 | ) |
| Less: Net income (loss) allocated to participating securities-basic: | | | | | | | |
| Preferred stock | | | 302 | | | - | |
| Non-vested restricted stock | | | 81 | | | - | |
| Net income (loss) available to common stock holders-basic | | | 4,722 | | | (888 | ) |
| Add: Net income (loss) allocated per two-class method-diluted: | | | | | | | |
| Stock options and Class C warrants | | | 18 | | | - | |
| Net income (loss) available to common stockholders-diluted | | $ | 4,740 | | $ | (888 | ) |
| | | | | | | | |
| Weighted average common shares outstanding -basic | | | 94,800 | | | 67,125 | |
| Common stock equivalents from: | | | | | | | |
| Stock options | | | 114 | | | - | |
| Class C warrants | | | 4,780 | | | - | |
| Weighted average common shares outstanding -diluted | | | 99,694 | | | 67,125 | |
| | | | | | | | |
| Basic earnings (loss) per share | | $ | 0.05 | | $ | (0.01 | ) |
| Diluted earnings (loss) per share | | $ | 0.05 | | $ | (0.01 | ) |
| | | | | | | | |
| Common stock equivalent shares excluded due to anti-dilutive effect | | | 1,147 | | | 1,770 | |
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7. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank has financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments.
The following table summarizes the Bank’s off balance sheet unfunded commitments as of the dates shown:
| | | Contract or | | Contract or |
| | | Notional Amount | | Notional Amount |
| (Dollars in thousands) | | March 31, 2011 | | December 31, 2010 |
| Financial instruments whose contract amounts represent credit risk: | | | | | | |
| Commitments to extend credit in the form of loans | | | | | | |
| Commercial | | $ | 243,085 | | $ | 246,702 |
| Real estate construction | | | 8,009 | | | 10,568 |
| Real estate mortgage | | | | | | |
Mortgage | | | 2,284 | | | 4,265 |
| Home equity loans and lines of credit | | | 154,665 | | | 154,073 |
| Total real estate mortgage loans | | | 156,949 | | | 158,338 |
| Commercial real estate | | | 7,960 | | | 7,756 |
| Installment and consumer | | | 10,427 | | | 10,734 |
| Other | | | 19,141 | | | 10,395 |
| Standby letters of credit and financial guarantees | | | 9,034 | | | 8,531 |
| Account overdraft protection instruments | | | 118,904 | | | 118,596 |
| Total | | $ | 573,509 | | $ | 571,620 |
| | | | | | | |
Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the underlying contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments may expire without being drawn upon; therefore total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on the Bank’s credit evaluation of the customer. Collateral held varies, but may include real property, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The Company maintains a reserve for unfunded commitments as a component of the allowance for credit losses.
Standby letters of credit are conditional commitments issued to support a customer’s performance or payment obligation to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Interest rates on residential 1-4 family mortgage loan applications are typically rate locked during the application stage for periods ranging from 15 to 60 days, the most typical period being 45 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 results of operations. This activity is managed daily.
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.
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8. COMPREHENSIVE INCOME (LOSS)
The following table displays the components of comprehensive income (loss) for the periods shown:
| | | Three months ended |
| | | March 31, |
| (Dollars in thousands) | | 2011 | | 2010 |
| Net income (loss) as reported | | $ | 5,105 | | | $ | (888 | ) |
| | | | | | | | | |
| Unrealized holding (losses) gains on securities: | | | | | | | | |
| Unrealized holding (losses) gains arising during the period | | | (1,713 | ) | | | 4,886 | |
| Tax (provision) benefit | | | 667 | | | | (1,913 | ) |
| Unrealized holding (losses) gains arising during the period, net of tax | | | (1,046 | ) | | | 2,973 | |
| | | | | | | | | |
| Less: Reclassification adjustment for gains | | | | | | | | |
| on sales of securities | | | (267 | ) | | | (457 | ) |
| Tax provision | | | 104 | | | | 176 | |
| Net realized gains on sales of securities, net of tax | | | (163 | ) | | | (281 | ) |
| Total comprehensive income | | $ | 3,896 | | | $ | 1,804 | |
| | | | | | | | | |
9. LONG-TERM BORROWINGS AND JUNIOR SUBORDINATED DEBT
The following table summarized Bancorp’s long-term borrowings for the periods shown:
| (Dollars in thousands) | | March 31, 2011 | | December 31, 2010 |
| FHLB non-putable advances | | $ | 138,599 | | $ | 138,599 |
| FHLB putable advances | | | 30,000 | | | 30,000 |
| Total long-term borrowings | | $ | 168,599 | | $ | 168,599 |
| | | | | | | |
Long-term borrowings at March 31, 2011, consisted of notes with fixed maturities and structured advances with the FHLB totaling $168.6 million, unchanged from December 31, 2010. At March 31, 2011, Bancorp’s remaining total long-term borrowings with fixed maturities, or non-putable advances, was $138.6 million, with rates ranging from 2.32% to 5.03%. Bancorp also had three structured, or putable, advances totaling $30.0 million, with original terms of five years at rates ranging from 2.45% to 3.78%. The scheduled maturities on these structured advances occur in February 2013, August 2013 and March 2014, although the FHLB may under certain circumstances require payment of these structured advances prior to maturity. Principal payments due at scheduled maturity of Bancorp’s total long-term borrowings at March 31, 2011, were $50.1 million in 2012, $76.3 million in 2013 and $42.2 million in 2014.
Bancorp had no outstanding federal funds purchased from correspondent banks, borrowings from the discount window or reverse repurchase agreements at March 31, 2011.
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9. LONG-TERM BORROWINGS AND JUNIOR SUBORDINATED DEBT (continued)
At March 31, 2011, six wholly-owned subsidiary grantor trusts established by Bancorp had an outstanding balance of $51.0 million in trust preferred securities. During 2009, the Company exercised its right to defer regularly scheduled interest payments on outstanding junior subordinated debentures related to its trust preferred securities. At March 31, 2011, the Company had a balance in other liabilities of $2.1 million in accrued and unpaid interest expense related to these junior subordinated debentures, and it may not pay dividends on its capital stock until all accrued but unpaid interest has been paid in full. The Company had recorded and continues to record junior subordinated debenture interest expense in long-term borrowings expense. Under our December 2009 Written Agreement with the Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities (“DFCS”) and the Reserve Bank, the Company cannot resume interest payments on our trust preferred securities without prior regulatory approval.
The following table is a summary of current trust preferred securities issued by the grantor trusts and guaranteed by Bancorp:
(Dollars in thousands)
| | | | | Preferred | | | | Rate at | | | | Next possible |
| Issuance Trust | | Issuance date | | security amount | | Rate type 1 | | 3/31/11 | | Maturity date | | redemption date2 |
| West Coast Statutory Trust III | | September 2003 | | $ | 7,500 | | Variable | | 3.26 | % | | September 2033 | | Currently redeemable |
| West Coast Statutory Trust IV | | March 2004 | | | 6,000 | | Variable | | 3.10 | % | | March 2034 | | Currently redeemable |
| West Coast Statutory Trust V | | April 2006 | | | 15,000 | | Variable | | 1.74 | % | | June 2036 | | June 2011 |
| West Coast Statutory Trust VI | | December 2006 | | | 5,000 | | Variable | | 1.99 | % | | December 2036 | | December 2011 |
| West Coast Statutory Trust VII | | March 2007 | | | 12,500 | | Variable | | 1.86 | % | | March 2037 | | March 2012 |
| West Coast Statutory Trust VIII | | June 2007 | | | 5,000 | | Variable | | 1.69 | % | | June 2037 | | June 2012 |
| Total | | | | $ | 51,000 | | Weighted rate | | 2.17 | % | | | | |
| | | | | | | | | | | | | | | |
| 1 | The variable rate preferred securities reprice quarterly. |
| 2 | Securities are redeemable at the option of Bancorp following these dates. |
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10. SEGMENT AND RELATED INFORMATION
Bancorp accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the service provided. Intercompany items relate primarily to the provision of accounting, human resources, data processing and marketing services.
Summarized financial information concerning Bancorp’s reportable segments and the reconciliation to Bancorp’s consolidated results are shown in the following table. The “Other” column includes Bancorp’s trust operations and corporate-related items, including interest expense related to trust preferred securities. Investment in subsidiaries is netted out of the presentations below. The “Intersegment” column identifies the intersegment activities of revenues, expenses and other assets between the “Banking” and “Other” segments.
| (Dollars in thousands) | | Three months ended March 31, 2011 |
| | | Banking | | Other | | Intersegment | | Consolidated |
| Interest income | | $ | 24,906 | | $ | 12 | | | $ | - | | | $ | 24,918 |
| Interest expense | | | 3,130 | | | 276 | | | | - | | | | 3,406 |
| Net interest income (expense) | | | 21,776 | | | (264 | ) | | | - | | | | 21,512 |
| Provision for credit losses | | | 2,076 | | | - | | | | - | | | | 2,076 |
| Noninterest income | | | 8,389 | | | 798 | | | | (271 | ) | | | 8,916 |
| Noninterest expense | | | 21,892 | | | 932 | | | | (271 | ) | | | 22,553 |
| Income (loss) before income taxes | | | 6,197 | | | (398 | ) | | | - | | | | 5,799 |
| Provision (benefit) for income taxes | | | 849 | | | (155 | ) | | | - | | | | 694 |
| Net income (loss) | | $ | 5,348 | | $ | (243 | ) | | $ | - | | | $ | 5,105 |
| | | | | | | | | | | | | | | |
| Depreciation and amortization | | $ | 2,125 | | $ | 7 | | | $ | - | | | $ | 2,132 |
| Assets | | $ | 2,446,906 | | $ | 18,035 | | | $ | (13,084 | ) | | $ | 2,451,857 |
| Loans, net | | $ | 1,496,008 | | $ | - | | | $ | - | | | $ | 1,496,008 |
| Deposits | | $ | 1,940,957 | | $ | - | | | $ | (12,526 | ) | | $ | 1,928,431 |
| Equity | | $ | 314,632 | | $ | (37,644 | ) | | $ | - | | | $ | 276,988 |
| (Dollars in thousands) | | Three months ended March 31, 2010 |
| | | Banking | | | Other | | Intersegment | | | Consolidated |
| Interest income | | $ | 27,181 | | | $ | 17 | | | $ | - | | | $ | 27,198 | |
| Interest expense | | | 6,295 | | | | 270 | | | | - | | | | 6,565 | |
| Net interest income (expense) | | | 20,886 | | | | (253 | ) | | | - | | | | 20,633 | |
| Provision for credit losses | | | 7,634 | | | | - | | | | - | | | | 7,634 | |
| Noninterest income | | | 5,916 | | | | 779 | | | | (287 | ) | | | 6,408 | |
| Noninterest expense | | | 20,496 | | | | 886 | | | | (287 | ) | | | 21,095 | |
| Income (loss) before income taxes | | | (1,328 | ) | | | (360 | ) | | | - | | | | (1,688 | ) |
| Benefit for income taxes | | | (660 | ) | | | (140 | ) | | | - | | | | (800 | ) |
| Net income (loss) | | $ | (668 | ) | | $ | (220 | ) | | $ | - | | | $ | (888 | ) |
| | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | $ | 2,175 | | | $ | 9 | | | $ | - | | | $ | 2,184 | |
| Assets | | $ | 2,666,888 | | | $ | 15,268 | | | $ | (20,447 | ) | | $ | 2,661,709 | |
| Loans, net | | $ | 1,626,487 | | | $ | - | | | $ | - | | | $ | 1,626,487 | |
| Deposits | | $ | 2,085,071 | | | $ | - | | | $ | (19,648 | ) | | $ | 2,065,423 | |
| Equity | | $ | 299,997 | | | $ | (39,500 | ) | | $ | - | | | $ | 260,497 | |
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11. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS
A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that conveys or imposes the contractual right or obligation to either receive or deliver cash or another financial instrument. Examples of financial instruments included in Bancorp’s balance sheet are cash, federal funds sold, debt and equity securities, loans, demand, savings and other interest-bearing deposits, notes and debentures. Examples of financial instruments which are not included in the Bancorp balance sheet are commitments to extend credit and standby letters of credit.
Fair value is defined 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.
Accounting standards require the fair value of deposit liabilities with no stated maturity, such as demand deposits, NOW and money market accounts, to equal the carrying value of these financial instruments and does not allow for the recognition of the inherent value of core deposit relationships when determining fair value.
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.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents - The carrying amount is a reasonable estimate of fair value.
Trading securities – Trading securities held at March 31, 2011, are related solely to bonds, equity securities and mutual funds held in a Rabbi Trust for benefit of the Company’s deferred compensation plans. Fair values for trading securities are based on quoted market prices.
Investment securities - For substantially all 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 quoted market prices or dealer quotes if available. When quoted market prices are not readily accessible or available, the use of alternative approaches, such as matrix or model pricing or indicators from market makers, is 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 modeling techniques. If neither a quoted market price nor market prices for similar securities are available, fair value is estimated by discounting expected cash flows using a market derived discount rate as of the valuation date.
Our level 3 assets consist of pooled trust preferred securities and auction rate securities. The fair values of these securities were estimated using the discounted cash flow method. 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 adjusted for an additional liquidity premium.
Loans - The fair value of loans 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. An additional liquidity discount is also incorporated to more closely align the fair value with observed market prices.
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. A significant portion of the Bank's impaired loans are measured using the fair market value of the collateral.
Bank owned life insurance - The carrying amount is the cash surrender value of all policies, which approximates fair value.
Other real estate owned - Management obtains third party appraisals as well as independent fair market value assessments from realtors or persons involved in selling OREO in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. Management periodically reviews OREO and obtains periodic appraisals to determine whether the property continues to be carried at the lower of its recorded book value or fair value less estimated selling costs.
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11. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
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.
Short-term borrowings - The carrying amount is a reasonable estimate of fair value given the short-term nature of these financial instruments.
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 our commitments to extend credit carry current market interest rates if converted to loans.
The tables below present fair value information on certain assets broken down by recurring or nonrecurring measurement status. 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.
Assets are classified as level 1-3 based on the lowest level of input that has a significant effect on fair value. The following definitions describe the level 1-3 categories for inputs used in the tables presented below.
- Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
- Other observable inputs (Level 2): 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.
- Significant unobservable inputs (Level 3): 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.
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11. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
The following tables present fair value measurements for assets that are measured at fair value on a recurring basis subsequent to initial recognition for the periods shown:
| | | | | | Fair value measurements at March 31, 2011, using |
| | | | | | Quoted prices in active | | Other observable | | Significant unobservable |
| | | Total fair value | | markets for identical assets | | inputs | | inputs |
| (Dollars in thousands) | | March 31, 2011 | | (Level 1) | | (Level 2) | | (Level 3) |
| Trading securities | | $ | 771 | | $ | 771 | | $ | - | | $ | - |
| Available for sale securities: | | | | | | | | | | | | |
| U.S. Treasury securities | | | 4,282 | | | - | | | 4,282 | | | - |
| U.S. Government agency securities | | | 153,017 | | | - | | | 153,017 | | | - |
| Corporate securities | | | 9,850 | | | - | | | - | | | 9,850 |
| Mortgage-backed securities | | | 405,740 | | | - | | | 405,740 | | | - |
| Obligations of state and political subdivisions | | | 59,136 | | | - | | | 58,247 | | | 889 |
| Equity investments and other securities | | | 11,680 | | | - | | | 11,680 | | | - |
| Total recurring assets measured at fair value | | $ | 644,476 | | $ | 771 | | $ | 632,966 | | $ | 10,739 |
| | | | | | | | | | | | | |
| | | | | | Fair value measurements at December 31, 2010, using |
| | | | | | Quoted prices in active | | Other observable | | Significant unobservable |
| | | Total fair value | | markets for identical assets | | inputs | | inputs |
| (Dollars in thousands) | | December 31, 2010 | | (Level 1) | | (Level 2) | | (Level 3) |
| Trading securities | | $ | 808 | | $ | 808 | | $ | - | | $ | - |
| Available for sale securities: | | | | | | | | | | | | |
| U.S. Treasury securities | | | 14,392 | | | - | | | 14,392 | | | - |
| U.S. Government agency securities | | | 194,230 | | | - | | | 194,230 | | | - |
| Corporate securities | | | 9,392 | | | - | | | - | | | 9,392 |
| Mortgage-backed securities | | | 363,618 | | | - | | | 363,618 | | | - |
| Obligations of state and political subdivisions | | | 52,645 | | | - | | | 51,688 | | | 957 |
| Equity investments and other securities | | | 11,835 | | | 1 | | | 11,834 | | | - |
| Total recurring assets measured at fair value | | $ | 646,920 | | $ | 809 | | $ | 635,762 | | $ | 10,349 |
| | | | | | | | | | | | | |
The Company did not have any transfers between level 1, level 2, or level 3 instruments during the period. The Company transferred $14.4 million in U.S. Treasury securities from a level 1 instrument to a level 2 instrument at December 31, 2010. In addition, the Company had no material changes in valuation techniques for recurring and nonrecurring assets measured at fair value from the quarter ended March 31, 2011.
- 26 -
11. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL Instruments (continued)
The following table represents a reconciliation of level 3 instruments for assets that are measured at fair value on a recurring basis for the three months ended March 31, 2011, and 2010:
| | | Three months ended March 31, 2011 |
| | | | | | | | | | Reclassification of | | | | | | |
| | | | | | Gains (losses) | | gains (losses) from | | | | | | |
| | | | | | included in other | | adjustment for | | Purchases, | | | |
| | | Balance | | comprehensive | | impairment of | | Issuances, and | | Balance |
| (Dollars in thousands) | | January 1, 2011 | | income | | securities | | Settlements | | March 31, 2011 |
| Corporate securities | | $ | 9,392 | | $ | 458 | | | | | | $ | - | | $ | 9,850 |
| Obligations of state and political subdivisions | | | 957 | | | (68 | ) | | | - | | | - | | | 889 |
| Fair value | | $ | 10,349 | | $ | 390 | | | $ | - | | $ | - | | $ | 10,739 |
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, 2010 |
| | | | | | | | | | Reclassification of | | | | | | |
| | | | | | Gains | | gains (losses) from | | | | | | |
| | | | | | included in other | | adjustment for | | Purchases, | | | |
| | | Balance | | comprehensive | | impairment of | | Issuances, and | | Balance |
| (Dollars in thousands) | | January 1, 2010 | | income | | securities | | Settlements | | March 31, 2010 |
| Corporate securities | | $ | 9,753 | | $ | 478 | | | $ | - | | $ | - | | $ | 10,231 |
| Obligations of state and political subdivisions | | | 973 | | | 20 | | | | - | | | - | | | 993 |
| Fair value | | $ | 10,726 | | $ | 498 | | | $ | - | | $ | - | | $ | 11,224 |
| | | | | | | | | | | | | | | | | |
Certain assets are measured at fair value on a nonrecurring basis after initial recognition such as loans held for sale, loans measured for impairment and OREO. For the three months ended March 31, 2011, loans held for sale were subject to the lower of cost or market method of accounting. However, there were no impairments recognized on loans held for sale in first quarter 2011. For the three months ended March 31, 2011, certain loans included in Bancorp’s loan portfolio were deemed impaired. In addition, during the first quarter, certain properties were written down by a total of $.7 million to reflect additional decreases in estimated fair market value subsequent to the time such properties were placed into OREO.
There were no nonrecurring level 1 or 2 fair value measurements for the three months ended March 31, 2011, or the full year 2010. The following tables represent the level 3 fair value measurements for nonrecurring assets for the periods presented:
| | | Three months ended March 31, 2011 |
| (Dollars in thousands) | | Impairment | | Fair Value 1 |
| Loans measured for impairment | | $ | 3,414 | | $ | 19,423 |
| OREO | | | 657 | | | 18,046 |
| Total nonrecurring assets measured at fair value | | $ | 4,071 | | $ | 37,469 |
| | | | | | | |
| | | Twelve months ended December 31, 2010 |
| (Dollars in thousands) | | Impairment | | Fair Value 1 |
| Loans measured for impairment | | $ | 19,476 | | $ | 82,910 |
| OREO | | | 6,649 | | | 74,146 |
| Total nonrecurring assets measured at fair value | | $ | 26,125 | | $ | 157,056 |
| | | | | | | |
| 1 | Fair value excludes cost to sell collateral. |
- 27 -
11. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
The estimated fair values of financial instruments at March 31, 2011, are as follows:
| (Dollars in thousands) | | Carrying Value | | Fair Value |
| FINANCIAL ASSETS: | | | | | | |
| Cash and cash equivalents | | $ | 175,055 | | $ | 175,055 |
| Trading securities | | | 771 | | | 771 |
| Investment securities | | | 643,705 | | | 643,705 |
| Federal Home Loan Bank stock | | | 12,148 | | | 12,148 |
| Net loans (net of allowance for loan losses | | | | | | |
| and including loans held for sale) | | | 1,497,422 | | | 1,400,045 |
| Bank owned life insurance | | | 25,502 | | | 25,502 |
| | | | | | | |
| FINANCIAL LIABILITIES: | | | | | | |
| Deposits | | $ | 1,928,431 | | $ | 1,929,525 |
| Long-term borrowings | | | 168,599 | | | 174,878 |
| | | | | | | |
| Junior subordinated debentures-variable | | | 51,000 | | | 26,731 |
The estimated fair values of financial instruments at December 31, 2010, are as follows:
| (Dollars in thousands) | | Carrying Value | | Fair Value |
| FINANCIAL ASSETS: | | | | | | |
| Cash and cash equivalents | | $ | 177,991 | | $ | 177,991 |
| Trading securities | | | 808 | | | 808 |
| Investment securities | | | 646,112 | | | 646,112 |
| Federal Home Loan Bank stock | | | 12,148 | | | 12,148 |
| Net loans (net of allowance for loan losses | | | | | | |
| and including loans held for sale) | | | 1,499,155 | | | 1,407,366 |
| Bank owned life insurance | | | 25,313 | | | 25,313 |
| | | | | | | |
| FINANCIAL LIABILITIES: | | | | | | |
| Deposits | | $ | 1,940,522 | | $ | 1,942,301 |
| Long-term borrowings | | | 168,599 | | | 175,305 |
| | | | | | | |
| Junior subordinated debentures-variable | | | 51,000 | | | 26,597 |
- 28 -
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, 2010 (“2010 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 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. 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,” “plan,” “believes,” “anticipates,” “estimates,” “predicts,” “expects,” “projects,” “potential,” “likely,” or “continue,” or words of similar import, often help identify “forward-looking statements,” which include any statements that expressly or implicitly predict future events, results, or performance. Factors that could cause events, results or performance to differ from those expressed or implied by our forward-looking statements include, among others, risks discussed in Item 1A, “Risk Factors” of the 2010 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 affect the demand for our loan and other products, lead to declines in credit quality and increase in loan losses, negatively affect the value and salability of the real estate that we own or that is the collateral for many of our loans, and hinder our ability to increase lending activities;
- Changing bank regulatory conditions, policies, or programs, whether arising as new legislation or regulatory initiatives or changes in our regulatory classifications, that could lead to restrictions on activities of banks generally or West Coast Bank (the “Bank”) in particular, increased costs, including higher 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 or 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 the slope and level of the yield curve, 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 the Company’s investment securities; and
- Changes or failures in technology or third party vendor relationships in important revenue production or service areas or increases in required investments in technology that could reduce our revenues, increase our costs, or lead to disruptions in our business.
Furthermore, forward-looking statements are subject to risks and uncertainties related to the Company’s ability to, among other things: dispose of properties or other assets obtained through foreclosures at expected prices and within a reasonable period of time; attract and retain key personnel; generate loan and deposit balances at projected spreads; sustain fee generation including gains on sales of loans; maintain asset quality and control risk; limit the amount of net loan charge-offs; manage its interest rate sensitivity position in periods of changing market interest rates; adapt to changing customer deposit, investment and borrowing behaviors; control expense growth; and monitor and manage the Company’s 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. 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.
Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission (“SEC”).
Community Reinvestment Act (“CRA”)
The Bank received a CRA rating of satisfactory during its most recent CRA examination in September 2010.
- 29 -
First Quarter 2011 Financial Overview
During first quarter 2011, we recorded:
- Net income of $5.1 million compared to a net loss of $.9 million in first quarter 2010;
- A net interest margin of 3.81%, an increase of 43 basis points from 3.38% in first quarter 2010;
- An average rate paid on total deposits of .38%, a 45 basis point decline from .83% in first quarter 2010;
- A provision for credit losses of $2.1 million, a reduction of $5.5 million from $7.6 million for the same quarter in 2010;
- Net loan charge-offs of $2.7 million, a decline from $5.8 million in first quarter 2010; and
Other real estate owned (“OREO”) valuation adjustments and net losses on OREO sales of $.3 million, a reduction from $2.1 million in first quarter 2010. Management continued to proactively implement and execute certain strategies that have resulted in significant strengthening of the Company’s balance sheet, including:
- Increasing the Bank’s total and tier 1 risk-based capital ratios to 18.28% and 17.02%, respectively, at March 31, 2011, up from 16.50% and 15.24% at March 31, 2010;
- Improving the Bank’s leverage ratio from 11.16% a year ago, to 12.87% at March 31, 2011; and
- Reducing total nonperforming assets by 29% or $37.4 million over the past twelve months, to $93.3 million at quarter end.
Results of Operations
Three months ended March 31, 2011 and 2010
Net Income (Loss). Net income for the three months ended March 31, 2011, was $5.1 million, as compared to a net loss of $.9 for the three months ended March 31, 2010. Earnings per diluted share for the three months ended March 31, 2011, was $0.05, as compared to a loss per diluted share of $0.01 for the three months ended March 31, 2010. For additional detail regarding calculation of our earnings per diluted share in the current quarter and year to date, see Note 6 “Earnings (Loss) Per Share” of our interim financial statements included under Item 1 of this report.
- 30 -
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) | | March 31, 2011 | | March 31, 2010 | | December 31, 2010 |
| | | 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 | | $ | 106,794 | | | $ | 70 | | 0.26 | % | | $ | 227,278 | | | $ | 145 | | 0.26 | % | | $ | 142,398 | | | $ | 94 | | 0.26 | % |
| Federal funds sold | | | 3,947 | | | | 1 | | 0.09 | % | | | 12,912 | | | | 3 | | 0.09 | % | | | 3,996 | | | | 1 | | 0.09 | % |
| Taxable securities 2 | | | 622,208 | | | | 4,069 | | 2.65 | % | | | 505,745 | | | | 3,611 | | 2.90 | % | | | 592,078 | | | | 3,569 | | 2.39 | % |
| Nontaxable securities 3 | | | 51,241 | | | | 737 | | 5.83 | % | | | 63,781 | | | | 917 | | 5.83 | % | | | 54,698 | | | | 762 | | 5.53 | % |
| Loans, including fees 4 | | | 1,530,422 | | | | 20,299 | | 5.38 | % | | | 1,703,597 | | | | 22,842 | | 5.44 | % | | | 1,558,757 | | | | 21,350 | | 5.43 | % |
| Total interest earning assets | | | 2,314,612 | | | | 25,176 | | 4.41 | % | | | 2,513,313 | | | | 27,518 | | 4.44 | % | | | 2,351,927 | | | | 25,776 | | 4.35 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | (40,296 | ) | | | | | | | | | (39,957 | ) | | | | | | | | | (42,208 | ) | | | | | | |
| Premises and equipment | | | 26,667 | | | | | | | | | | 28,190 | | | | | | | | | | 26,845 | | | | | | | |
| Other assets | | | 149,885 | | | | | | | | | | 175,829 | | | | | | | | | | 148,596 | | | | | | | |
| Total assets | | $ | 2,450,868 | | | | | | | | | $ | 2,677,375 | | | | | | | | | $ | 2,485,160 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY: | | | | | | | | | | |
| Interest bearing demand | | $ | 344,090 | | | $ | 78 | | 0.09 | % | | $ | 321,070 | | | $ | 155 | | 0.20 | % | | $ | 349,071 | | | $ | 82 | | 0.09 | % |
| Savings | | | 106,309 | | | | 40 | | 0.15 | % | | | 98,075 | | | | 119 | | 0.49 | % | | | 105,114 | | | | 44 | | 0.16 | % |
| Money market | | | 660,672 | | | | 634 | | 0.39 | % | | | 642,594 | | | | 1,345 | | 0.85 | % | | | 670,580 | | | | 708 | | 0.42 | % |
| Time deposits | | | 269,038 | | | | 1,057 | | 1.59 | % | | | 507,706 | | | | 2,673 | | 2.14 | % | | | 281,009 | | | | 1,175 | | 1.66 | % |
| Total interest bearing deposits | | | 1,380,109 | | | | 1,809 | | 0.53 | % | | | 1,569,445 | | | | 4,292 | | 1.11 | % | | | 1,405,774 | | | | 2,009 | | 0.57 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | - | | | | - | | 0.00 | % | | | 13,100 | | | | 145 | | 4.49 | % | | | - | | | | - | | 0.00 | % |
| Long-term borrowings 5 | | | 219,599 | | | | 1,597 | | 2.95 | % | | | 301,199 | | | | 2,127 | | 2.86 | % | | | 217,256 | | | | 1,611 | | 2.94 | % |
| Total borrowings | | | 219,599 | | | | 1,597 | | 2.95 | % | | | 314,299 | | | | 2,272 | | 2.93 | % | | | 217,256 | | | | 1,611 | | 2.94 | % |
| Total interest bearing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| liabilities | | | 1,599,708 | | | | 3,406 | | 0.86 | % | | | 1,883,744 | | | | 6,564 | | 1.41 | % | | | 1,623,030 | | | | 3,620 | | 0.88 | % |
| Demand deposits | | | 552,229 | | | | | | | | | | 519,492 | | | | | | | | | | 566,998 | | | | | | | |
| Other liabilities | | | 24,983 | | | | | | | | | | 19,762 | | | | | | | | | | 18,858 | | | | | | | |
| Total liabilities | | | 2,176,920 | | | | | | | | | | 2,422,998 | | | | | | | | | | 2,208,886 | | | | | | | |
| Stockholders' equity | | | 273,948 | | | | | | | | | | 254,377 | | | | | | | | | | 276,274 | | | | | | | |
| Total liabilities and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| stockholders' equity | | $ | 2,450,868 | | | | | | | | | $ | 2,677,375 | | | | | | | | | $ | 2,485,160 | | | | | | | |
| Net interest income | | | | | | $ | 21,770 | | | | | | | | | $ | 20,954 | | | | | | | | | $ | 22,156 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest spread | | | | | | | | | 3.55 | % | | | | | | | | | 3.03 | % | | | | | | | | | 3.46 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest margin | | | | | | | | | 3.81 | % | | | | | | | | | 3.38 | % | | | | | | | | | 3.74 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1 | | Yield/rate calculations have been based on more detailed information and therefore may not recompute exactly due to rounding. |
| 2 | | First quarter 2011 and fourth quarter 2010 do not include Federal Home Loan Bank (FHLB) stock balances. First quarter 2010 includes FHLB stock balances. |
| 3 | | Interest earned on nontaxable securities has been computed on a 35% tax equivalent basis. The tax equivalent basis adjustment for the three months ended March 31, 2011, and 2010, was $.26 million and $.32 million, respectively, and $.27 million for three months ended December 31, 2010. |
| 4 | | Includes balances of loans held for sale and nonaccrual loans. |
| 5 | | Includes junior subordinated debentures with average balance of $51.0 million for the three months ended March 31, 2011, and 2010, and December 31, 2010. |
- 31 -
First quarter 2011 net interest income of $21.5 million increased $.9 million from the same quarter in 2010. Net interest income on a tax equivalent basis was $21.8 million in the most recent quarter, up from $21.0 million in the first quarter of 2010. Average interest earning assets decreased $198.7 million, or 7.9%, to $2.31 billion in the first quarter of 2011 from $2.51 billion for the same period in 2010, while average interest bearing liabilities decreased $284.0 million, or 15.1%, to $1.60 billion.
The first quarter 2011 net interest margin of 3.81% increased 43 basis points from first quarter 2010, predominantly due to a lower rate on interest bearing deposits and lower time deposit balances. The spread between the yield earned on loans and rate paid on interest bearing deposits improved 52 basis points year-over-year in the first quarter notwithstanding a significant shift in average earning asset mix as higher yielding loan balances declined over this period. Collectively, cash equivalents and investment securities earned 286 basis points less than the loan portfolio during the most recent quarter.
As of March 31, 2011, the Bank had $682.3 million in floating and adjustable rate loans with interest rate floors. Of these loans, $468.7 million were at their floor rate. These floors have benefited the Company’s loan yield and net interest income and margin over the past year. While dependent on how quickly and by how much market interest rates rise, as well as how the slope of the market yield curve may change, we anticipate our yields for loans at floors to lag underlying changes in market interest rates in a rising market interest rate environment.
At March 31, 2011, we estimated we remained slightly asset sensitive over the next twelve month measurement period, meaning that earning assets are expected to mature or reprice more quickly than interest bearing liabilities over this period. Whether we will be able to continue recent positive trends in or maintain our net interest margin will depend on our ability to generate new loans utilizing excess liquidity, to further reduce nonperforming assets, and to control our costs of funds, all of which will depend on economic conditions, competitive factors and market interest rate trends. For more information see the discussion under the heading “Quantitative and Qualitative Disclosures about Market Risk” in our 2010 10-K.
Provision for Credit Losses. Bancorp recorded provision for credit losses for the first quarters of 2011 and 2010 of $2.1 million and $7.6 million, respectively. The Company continued to experience a reduction in loan net charge-offs, particularly in the real estate mortgage, real estate construction, and commercial categories. Whether we will be able to continue the trend of decreasing provision for credit losses will depend primarily on economic conditions and the interest rate environment, as an increase in interest rates could put pressure on the ability of our borrowers to repay loans. For more information, see the discussion under the subheading “Allowance for Credit Losses and Net Loan Charge-offs” below.
Noninterest Income. Total noninterest income of $8.9 million for the quarter ended March 31, 2011, increased $2.5 million from $6.4 million in the first quarter of 2010. The increase was primarily due to a $1.7 million reduction in OREO valuation adjustments. Excluding the effects of OREO valuation adjustments, the Company’s noninterest income increased $.8 million compared to first quarter 2010 primarily due to $.4 million growth in both gains on sales of loans and payment systems over this period.
The following table illustrates the components and change in noninterest income for the periods shown:
| | | Three months ended | | Three months ended |
| (Dollars in thousands) | | March 31, | | Change | | December 31, | | Change |
| | | 2011 | | 2010 | | $ | | % | | 2010 | | $ | | % |
| Noninterest income | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service charges on deposit accounts | | $ | 3,644 | | | $ | 3,596 | | | $ | 48 | | | 1 | % | | $ | 3,736 | | | $ | (92 | ) | | -2 | % |
| Payment systems related revenue | | | 2,930 | | | | 2,536 | | | | 394 | | | 16 | % | | | 2,984 | | | | (54 | ) | | -2 | % |
| Trust and investment services revenues | | | 1,148 | | | | 979 | | | | 169 | | | 17 | % | | | 1,143 | | | | 5 | | | 0 | % |
| Gains on sales of loans | | | 513 | | | | 141 | | | | 372 | | | 264 | % | | | 568 | | | | (55 | ) | | -10 | % |
| Other | | | 748 | | | | 757 | | | | (9 | ) | | -1 | % | | | 733 | | | | 15 | | | 2 | % |
| Gain on sales of securities | | | 267 | | | | 457 | | | | (190 | ) | | -42 | % | | | 617 | | | | (350 | ) | | -57 | % |
| Total | | | 9,250 | | | | 8,466 | | | | 784 | | | 9 | % | | | 9,781 | | | | (531 | ) | | -5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| OREO gains (losses) on sale | | | 323 | | | | 301 | | | | 22 | | | 7 | % | | | 336 | | | | (13 | ) | | -4 | % |
| OREO valuation adjustments | | | (657 | ) | | | (2,359 | ) | | | 1,702 | | | 72 | % | | | (1,522 | ) | | | 865 | | | 57 | % |
| Total | | | (334 | ) | | | (2,058 | ) | | | 1,724 | | | 84 | % | | | (1,186 | ) | | | 852 | | | 72 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total noninterest income | | $ | 8,916 | | | $ | 6,408 | | | $ | 2,508 | | | 39 | % | | $ | 8,595 | | | $ | 321 | | | 4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Guidance issued by the FDIC in November 2010 states that its supervised institutions, including the Bank, are to review check clearing procedures to ensure they operate in a manner that avoids maximizing customer overdrafts and related fees. If the Bank changes its clearing procedures, noninterest income may be adversely affected.
- 32 -
Noninterest Expense. Noninterest expense for the three months ended March 31, 2011, was $22.6 million, an increase of $1.5 million compared to $21.1 million in first quarter 2010. Salaries and employee benefits expense increased $.7 million over the same period in the prior year; primarily reflecting higher variable performance based compensation and restricted stock expense associated with grants made in April 2010. Payment system related expenses grew $.2 million or 24% due to higher customer transaction volumes and the discontinuance of our debit card reward program during the quarter. A reversal of Federal Deposit Insurance Corporation (“FDIC”) insurance premium expense in first quarter of 2010 resulted in the $.5 million increase in other noninterest expense year over year first quarter.
The following table illustrates the components and changes in noninterest expense for the periods shown:
| | | Three months ended | | Three months ended |
| (Dollars in thousands) | | March 31, | | March 31, | | Change | | December 31, | | Change |
| | | 2011 | | 2010 | | $ | | % | | 2010 | | $ | | % |
| Noninterest expense | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | $ | 11,877 | | | $ | 11,175 | | | $ | 702 | | | 6 | % | | $ | 11,521 | | | $ | 356 | | | 3 | % |
| Equipment | | | 1,528 | | | | 1,576 | | | | (48 | ) | | -3 | % | | | 1,540 | | | | (12 | ) | | -1 | % |
| Occupancy | | | 2,165 | | | | 2,184 | | | | (19 | ) | | -1 | % | | | 2,245 | | | | (80 | ) | | -4 | % |
| Payment systems related expense | | | 1,247 | | | | 1,004 | | | | 243 | | | 24 | % | | | 1,297 | | | | (50 | ) | | -4 | % |
| Professional fees | | | 982 | | | | 861 | | | | 121 | | | 14 | % | | | 822 | | | | 160 | | | 19 | % |
| Postage, printing and office supplies | | | 810 | | | | 804 | | | | 6 | | | 1 | % | | | 816 | | | | (6 | ) | | -1 | % |
| Marketing | | | 651 | | | | 687 | | | | (36 | ) | | -5 | % | | | 800 | | | | (149 | ) | | -19 | % |
| Communications | | | 378 | | | | 382 | | | | (4 | ) | | -1 | % | | | 388 | | | | (10 | ) | | -3 | % |
| Other noninterest expense | | | 2,915 | | | | 2,422 | | | | 493 | | | 20 | % | | | 3,901 | | | | (986 | ) | | -25 | % |
| Total | | $ | 22,553 | | | $ | 21,095 | | | $ | 1,458 | | | 7 | % | | $ | 23,330 | | | $ | (777 | ) | | -3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
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, or a failure to manage operating and control environments could adversely affect our ability to limit expense growth in the future.
Income Taxes. The Company recorded income tax expense for the three months ended March 31, 2011, of $.7 million compared to a tax benefit of $.8 million during the first quarter of 2010. The provision for income taxes in first quarter 2011 is the result of the impact on tax expense from a $1.8 million decrease in gross unrealized gains on the investment securities portfolio during the quarter. As of March 31, 2011, the Company maintained a valuation allowance of $21.5 million against its deferred tax asset balance of $28.4 million, for a net deferred tax asset of $6.9 million. The Company’s future net deferred tax asset and income tax provision or benefit will continue to be impacted by changes in the gross unrealized gain on the Company’s investment portfolio.
The following table illustrates the components of the provision (benefit) for income taxes for the periods shown:
| | | Three months ended | | Three months ended |
| (Dollars in thousands) | | March 31, | | March 31, | | | | | December 31, | | | | |
| | | 2011 | | 2010 | | Change | | 2010 | | Change |
| Benefit for income taxes net of initial | | | | | | | | | | | | | | | | | |
| establishment of deferred tax asset valuation allowance | | $ | - | | $ | - | | | $ | - | | $ | - | | $ | - | |
| Provision (benefit) for income taxes from deferred | | | | | | | | | | | | | | | | | |
| tax asset valuation allowance: | | | | | | | | | | | | | | | | | |
| Unrealized loss (gain) on securities | | | 694 | | | (800 | ) | | | 1,494 | | | 2,077 | | | (1,383 | ) |
| Change in deferred tax assets-tax return adjustments | | | - | | | - | | | | - | | | 1,472 | | | (1,472 | ) |
| Total provision (benefit) for income taxes | | $ | 694 | | $ | (800 | ) | | $ | 1,494 | | $ | 3,549 | | $ | (2,855 | ) |
| | | | | | | | | | | | | | | | | | |
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Balance Sheet Overview
Balance sheet highlights are as follows:
- Total assets were $2.5 billion as of March 31, 2011, substantially unchanged from December 31, 2010;
- Total loans also remained unchanged at $1.5 billion from the balance at December 31, 2010, primarily due to a positive trend in our quarterly loan origination volume;
- The combined balance of total cash equivalents and investment securities was $768 million, or 33% of earning assets, at March 31, 2011; and
- Total deposits of $1.9 billion at March 31, 2011, was also relatively unchanged from year end 2010, with a continuing deposit balance mix shift from time deposits to non-time deposits.
Our balance sheet management efforts are focused on increasing loan balances within our concentration parameters to targeted customer segments as opportunities arise, maintaining a strong capital position until we have more certainty regarding economic conditions, retaining sufficient liquidity, and limiting loan concentrations within our loan portfolio. We also expect to further reduce nonperforming assets by resolving nonaccrual loans and disposing of OREO properties.
Cash and Cash Equivalents
Total cash and cash equivalents decreased slightly to $175.1 million at March 31, 2011, from $178.0 million at December 31, 2010.
| (Dollars in thousands) | | March 31, | | % of | | March 31, | | % of | | Change | | December 31, | | % of |
| | | 2011 | | total | | 2010 | | total | | Amount | | % | | 2010 | | total |
| Cash and Cash equivalents: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | 50,865 | | 29 | % | | $ | 47,002 | | 16 | % | | $ | 3,863 | | | 8 | % | | $ | 42,672 | | 24 | % |
| Federal funds sold | | | 1,966 | | 1 | % | | | 3,859 | | 1 | % | | | (1,893 | ) | | -49 | % | | | 3,367 | | 2 | % |
| Interest-bearing deposits in other banks | | | 122,224 | | 70 | % | | | 238,680 | | 83 | % | | | (116,456 | ) | | -49 | % | | | 131,952 | | 74 | % |
| Total cash and cash equivalents | | $ | 175,055 | | 100 | % | | | 289,541 | | 100 | % | | $ | (114,486 | ) | | -40 | % | | $ | 177,991 | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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Investment Portfolio
The composition and carrying value of Bancorp’s investment portfolio is as follows:
| | | March 31, 2011 | | December 31, 2010 | | March 31, 2010 |
| | | | | | | | | 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 | | $ | 4,259 | | $ | 4,282 | | $ | 23 | | | $ | 14,347 | | $ | 14,392 | | $ | 45 | | | $ | 24,740 | | $ | 24,849 | | $ | 109 | |
| U.S. Government agency securities | | | 153,637 | | | 153,017 | | | (620 | ) | | | 193,901 | | | 194,230 | | | 329 | | | | 136,029 | | | 136,208 | | | 179 | |
| Corporate securities | | | 14,514 | | | 9,850 | | | (4,664 | ) | | | 14,499 | | | 9,392 | | | (5,107 | ) | | | 14,451 | | | 10,231 | | | (4,220 | ) |
| Mortgage-backed securities | | | 403,707 | | | 405,740 | | | 2,033 | | | | 359,965 | | | 363,618 | | | 3,653 | | | | 326,757 | | | 330,849 | | | 4,092 | |
Obligations of state and political subdivisions | | | 57,305 | | | 59,136 | | | 1,831 | | | | 51,111 | | | 52,645 | | | 1,534 | | | | 58,271 | | | 60,111 | | | 1,840 | |
| Equity and other securities | | | 11,397 | | | 11,680 | | | 283 | | | | 11,423 | | | 11,835 | | | 412 | | | | 9,261 | | | 9,352 | | | 91 | |
| Total Investment Portfolio | | $ | 644,819 | | $ | 643,705 | | $ | (1,114 | ) | | $ | 645,246 | | $ | 646,112 | | $ | 866 | | | $ | 569,509 | | $ | 571,600 | | $ | 2,091 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At March 31, 2011, the estimated fair value of the investment portfolio was $643.7 million, compared to $646.1 million at 2010 year end, a decrease of .4% or $2.4 million. The net unrealized loss on the investment portfolio was $1.1 million at March 31, 2011, compared to a net unrealized gain of $.9 million at year end 2010. A decline in net unrealized gains in the Company’s mortgage-backed securities category, primarily due to rising market interest rates, led to an overall net unrealized loss in the Company’s investment portfolio.
The investment portfolio increased $72.1 million since March 31, 2010. Over the past twelve months, the Company reinvested cash primarily in mortgage-backed securities but also U.S. Government agency securities. The effective duration of the investment securities portfolio was 3.1 years at March 31, 2011.
For additional detail regarding our investment securities portfolio, see Note 3 “Investment Securities” and Note 11 “Fair Value Measurement and Fair Values of Financial Instruments” of our interim financial statements included under Item 1 of this report.
Loan Portfolio
The composition of the Bank’s loan portfolio is as follows for the periods shown:
| (Dollars in thousands) | | Mar. 31, | | % of total | | Dec. 31, | | % of total | | Change | | Mar. 31, | | % of total | | Change |
| | | 2011 | | loans | | 2010 | | loans | | Amount | | 2010 | | loans | | Amount |
| Commercial loans | | $ | 306,864 | | 20.0 | % | | $ | 309,327 | | 20.1 | % | | $ | (2,463 | ) | | $ | 342,385 | | 20.6 | % | | $ | (35,521 | ) |
| Commercial real estate construction | | | 17,711 | | 1.2 | % | | | 19,760 | | 1.3 | % | | | (2,049 | ) | | | 23,554 | | 1.4 | % | | | (5,843 | ) |
| Residential real estate construction | | | 19,896 | | 1.2 | % | | | 24,325 | | 1.6 | % | | | (4,429 | ) | | | 60,879 | | 3.7 | % | | | (40,983 | ) |
| Total real estate construction loans | | | 37,607 | | 2.4 | % | | | 44,085 | | 2.9 | % | | | (6,478 | ) | | | 84,433 | | 5.1 | % | | | (46,826 | ) |
| Mortgage | | | 63,780 | | 4.2 | % | | | 67,525 | | 4.4 | % | | | (3,745 | ) | | | 74,613 | | 4.4 | % | | | (10,833 | ) |
| Nonstandard mortgage | | | 11,140 | | 0.7 | % | | | 12,523 | | 0.8 | % | | | (1,383 | ) | | | 18,233 | | 1.1 | % | | | (7,093 | ) |
| Home equity loans and lines of credit | | | 266,606 | | 17.4 | % | | | 268,968 | | 17.5 | % | | | (2,362 | ) | | | 277,527 | | 16.6 | % | | | (10,921 | ) |
| Total real estate mortgage loans | | | 341,526 | | 22.3 | % | | | 349,016 | | 22.7 | % | | | (7,490 | ) | | | 370,373 | | 22.1 | % | | | (28,847 | ) |
| Commercial real estate loans | | | 834,880 | | 54.3 | % | | | 818,577 | | 53.3 | % | | | 16,303 | | | | 853,180 | | 51.2 | % | | | (18,300 | ) |
| Installment and other consumer loans | | | 14,823 | | 1.0 | % | | | 15,265 | | 1.0 | % | | | (442 | ) | | | 16,562 | | 1.0 | % | | | (1,739 | ) |
| Total loans | | $ | 1,535,700 | | 100.0 | % | | $ | 1,536,270 | | 100.0 | % | | $ | (570 | ) | | $ | 1,666,933 | | 100.0 | % | | $ | (131,233 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Bank’s total loan portfolio was $1.54 billion at March 31, 2011, substantially unchanged from December 31, 2010. While loan balances contracted as compared to March 31, 2010, we have experienced a steady increase in our quarterly loan origination volumes over the past year which resulted in loan balances stabilizing in the most recent quarter. The real estate construction loan portfolio contracted $46.8 million or 55% since March 31, 2010, and measured just 2% of total loans at most recent quarter end compared to 5% a year ago. The Company also exited a number of higher risk rated loans over the past year which contributed to the $35.5 million or 10% contraction in the commercial loan category from March 31, 2010. Additionally, commercial credit line commitment utilization at most recent quarter end remained low compared to historical levels. At quarter end the Company’s new loan pipeline stood at its highest point since third quarter 2008.
Interest and fees earned on our loan portfolio are our primary source of revenue, and it will be very important that we continue to improve loan originations and increase loan balances in order to grow overall revenues. Our ability to achieve loan growth will be dependent on many factors, including the effects of competition, economic conditions in our markets, health of the real estate market, retention of key personnel and valued customers, and our ability to close loans in the pipeline.
At March 31, 2011, the Bank had outstanding loans of $5.2 million to persons serving as directors, executive officers, principal stockholders and their related interests. These loans, when made, were made 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 March 31, 2011, and December 31, 2010, Bancorp had no bankers’ acceptances.
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Below is a discussion of our loan portfolio by category.
Commercial. At March 31, 2011, the outstanding balance of commercial loans and lines was $306.9 million or approximately 20% of the Company’s total loan portfolio. The total commercial lines and loans balance decreased by $2.4 million or 1% from $309.3 million at year end 2010.
At March 31, 2011, commercial lines of credit accounted for $187.4 million or 61% of total outstanding commercial loans and lines, while commercial term loans accounted for $119.5 million or 39% of the total. Over the past 12 months, commercial line utilization remained stable at 42% or towards the low end of our customers’ utilization range over the past few years.
The Company has elected to limit new loan originations to customers in certain sectors, including businesses related to the housing industry, and exit certain high risk client relationships. However, in terms of our long term strategy we expect the commercial loan portfolio to be an important contributor to growth in future revenues. Our capital and liquidity positions will support our efforts to pursue opportunities in targeted commercial lending segments.
Real Estate Construction. At March 31, 2011, the balance of real estate construction loans was $37.6 million, a reduction of $6.5 million or 15% from $44.1 million at December 31, 2010. Total real estate construction loans represented 2% of the total loan portfolio at the end of the first quarter, down from 3% at December 31, 2010, and 5% a year ago. Additionally, at the end of the first quarter 2011, the Bank’s real estate construction concentration at 18% 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.
Until the excess supply and market demand for new homes is more in balance and volume of homes being foreclosed upon declines, there will be limited demand for new residential construction loans in the market place. Limited financing for vertical construction may be made available, particularly under existing commitments to certain builders.
Real Estate Mortgage. The following table presents the components of our real estate mortgage loan portfolio:
| | | | | | | | | | | | | | | Change from | | | | | | |
| | | March 31, 2011 | | December 31, 2010 | | December 31, 2010 | | March 31, 2010 |
| | | | | | Percent of | | | | | Percent of | | | | | | | | | | | | Percent of |
| | | | | | loan | | | | | loan | | | | | | | | | | | | loan |
| (Dollars in thousands) | | Amount | | category | | Amount | | category | | Amount | | Percent | | Amount | | category |
| Mortgage | | $ | 63,780 | | 19 | % | | $ | 67,525 | | 19 | % | | $ | (3,745 | ) | | -6 | % | | $ | 74,613 | | 20 | % |
| Nonstandard mortgage product | | | 11,140 | | 3 | % | | | 12,523 | | 4 | % | | | (1,383 | ) | | -11 | % | | | 18,233 | | 5 | % |
| Home equity loans and lines of credit | | | 266,606 | | 78 | % | | | 268,968 | | 77 | % | | | (2,362 | ) | | -1 | % | | | 277,527 | | 75 | % |
| Total real estate mortgage | | $ | 341,526 | | 100 | % | | $ | 349,016 | | 100 | % | | $ | (7,490 | ) | | -2 | % | | $ | 370,373 | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
At March 31, 2011, real estate mortgage loans totaled $341.5 million or approximately 22% of the Company’s total loan portfolio. This loan category included $11.1 million in nonstandard mortgage loans, a decline from $12.5 million at December 31, 2010, and $18.2 million a year ago. At March 31, 2011, mortgage loans measured $63.8 million or 19% of total real estate mortgage loans, $31.0 million of which were standard residential mortgage loans to homeowners. The remaining $32.8 million in mortgage loans were associated with commercial interests utilizing residences as collateral. Such commercial interests included $20.5 million related to businesses, $2.8 million related to condominiums, and $4.8 million related to ownership of residential land.
Home equity lines and loans represented 78% or $266.6 million of the real estate mortgage portfolio at March 31, 2011. The overall home equity line utilization measured approximately 61% at March 31, 2011.
While delinquencies and charge-offs in the mortgage loan portfolios have been modest to date, the extended weaknesses in the economy and housing market coupled with persistent high unemployment in our markets may lead to increased real estate mortgage delinquencies and charge-offs 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.
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The following table shows home equity lines of credit and loans by market areas at the date shown and indicates a geographic distribution of balances representative of our branch presence in these markets:
| (Dollars in thousands) | | March 31, 2011 | | December 31, 2010 |
| Region | | Amount | | Percent of total | | Amount | | Percent of total |
| Portland-Beaverton, Oregon / Vancouver, Washington | | $ | 126,762 | | 48 | % | | $ | 127,479 | | 48 | % |
| Salem, Oregon | | | 62,089 | | 23 | % | | | 62,533 | | 23 | % |
| Oregon non-metropolitan area | | | 27,368 | | 10 | % | | | 27,615 | | 10 | % |
| Olympia, Washington | | | 18,312 | | 7 | % | | | 17,236 | | 7 | % |
| Washington non-metropolitan area | | | 13,514 | | 5 | % | | | 14,489 | | 5 | % |
| Bend, Oregon | | | 5,019 | | 2 | % | | | 5,692 | | 2 | % |
| Other | | | 13,542 | | 5 | % | | | 13,924 | | 5 | % |
| Total home equity loan and line portfolio | | $ | 266,606 | | 100 | % | | $ | 268,968 | | 100 | % |
| | | | | | | | | | | | | |
Commercial Real Estate. The composition of commercial real estate loan portfolio based on collateral type is as follows:
| (Dollars in thousands) | | March 31, 2011 | | December 31, 2010 | | March 31, 2010 |
| | | | | | % of loan | | | | | % of loan | | | | | % of loan |
| | | Amount | | category | | Amount | | category | | Amount | | category |
| Office Buildings | | $ | 188,736 | | 22.6 | % | | $ | 182,376 | | 22.3 | % | | $ | 189,836 | | 22.2 | % |
| Retail Facilities | | | 110,859 | | 13.3 | % | | | 108,874 | | 13.3 | % | | | 112,908 | | 13.2 | % |
| Multi-Family - 5+ Residential | | | 59,707 | | 7.1 | % | | | 58,606 | | 7.2 | % | | | 49,411 | | 5.8 | % |
| Commercial/Agricultural | | | 58,435 | | 7.0 | % | | | 54,361 | | 6.6 | % | | | 60,239 | | 7.1 | % |
| Industrial parks and related | | | 58,269 | | 7.0 | % | | | 59,493 | | 7.3 | % | | | 58,318 | | 6.8 | % |
| Medical Offices | | | 57,406 | | 6.9 | % | | | 55,294 | | 6.8 | % | | | 60,390 | | 7.1 | % |
| Manufacturing Plants | | | 48,136 | | 5.7 | % | | | 47,341 | | 5.8 | % | | | 54,326 | | 6.4 | % |
| Hotels/Motels | | | 35,491 | | 4.2 | % | | | 35,724 | | 4.4 | % | | | 42,779 | | 5.0 | % |
| Assisted Living | | | 25,510 | | 3.1 | % | | | 25,669 | | 3.1 | % | | | 26,431 | | 3.1 | % |
| Mini Storage | | | 23,214 | | 2.8 | % | | | 24,678 | | 3.0 | % | | | 25,525 | | 3.0 | % |
| Land Development and Raw Land | | | 19,527 | | 2.3 | % | | | 19,534 | | 2.4 | % | | | 21,101 | | 2.5 | % |
| Food Establishments | | | 18,828 | | 2.3 | % | | | 16,370 | | 2.0 | % | | | 16,548 | | 1.9 | % |
| Other | | | 130,762 | | 15.7 | % | | | 130,257 | | 15.8 | % | | | 135,368 | | 15.9 | % |
| Total commercial real estate loans | | $ | 834,880 | | 100.0 | % | | $ | 818,577 | | 100.0 | % | | $ | 853,180 | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | |
The commercial real estate portfolio increased $16.3 million or 2% from December 31, 2010, to March 31, 2011. At quarter end, loans secured by office buildings and retail facilities accounted for 36% of the commercial real estate portfolio, relatively unchanged from prior periods shown.
The composition of the commercial real estate loan portfolio by occupancy type is as follows:
| | | March 31, 2011 | | December 31, 2010 | | Change | | March 31, 2010 |
| | | | | | Mix | | | | | Mix | | | | | Mix | | | | | | |
| (Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| Owner occupied | | $ | 397,309 | | 48 | % | | $ | 383,047 | | 47 | % | | $ | 14,262 | | 1 | % | | $ | 411,316 | | 48 | % |
| Non-owner occupied | | | 437,571 | | 52 | % | | | 435,530 | | 53 | % | | | 2,041 | | -1 | % | | | 441,864 | | 52 | % |
| Total commercial real estate loans | | $ | 834,880 | | 100 | % | | $ | 818,577 | | 100 | % | | $ | 16,303 | | | | | $ | 853,180 | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
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The mix between owner occupied and non-owner occupied commercial real estate has remained fairly stable over the past year. At March 31, 2011, the Bank’s commercial real estate concentration at 132.2% 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 property location:
| (Dollars in thousands) | | March 31, 2011 |
| | | | | | Number of | | Percent of |
| Region | | Amount | | loans | | total |
| Portland-Beaverton, Oregon / Vancouver, Washington | | $ | 448,752 | | 749 | | 53.8 | % |
| Salem, Oregon | | | 150,448 | | 403 | | 18.0 | % |
| Oregon non-metropoliton area | | | 55,178 | | 167 | | 6.6 | % |
| Seattle-Tacoma-Bellevue, Washington | | | 41,394 | | 44 | | 5.0 | % |
| Washington non-metropoliton area | | | 31,260 | | 112 | | 3.7 | % |
| Olympia, Washington | | | 28,522 | | 77 | | 3.4 | % |
| Bend, Oregon | | | 22,607 | | 24 | | 2.7 | % |
| Other | | | 56,719 | | 90 | | 6.8 | % |
| Total commercial real estate loans | | $ | 834,880 | | 1,666 | | 100.0 | % |
| | | | | | | | | |
As shown in the table above, the distribution of our commercial real estate portfolio at March 31, 2011, was fairly consistent with our branch presence in our operating markets. The average size of our commercial real estate loans was approximately $.5 million at March 31, 2011.
The following table shows the commercial real estate portfolio by year of stated maturity:
| | March 31, 2011 |
| | | | | Number of | | Percent of |
| (Dollars in thousands) | Amount | | loans | | total |
| 2011 | $ | 45,170 | | 86 | | 5.4 | % |
| 2012 | | 51,435 | | 83 | | 6.2 | % |
| 2013 & After | | 738,275 | | 1,497 | | 88.4 | % |
| Total commercial real estate loans | $ | 834,880 | | 1,666 | | 100.0 | % |
| | | | | | | | |
At March 31, 2011, the stated loan maturities for the remainder of 2011 and in 2012 totaled $96.6 million or a relatively modest 12% of the $834.9 million total commercial real estate portfolio. Commercial real estate markets continue to be vulnerable to financial and valuation pressures that may impact borrowers’ ability to perform consistent with terms and conditions of the borrower’s loan agreements and limit refinance options. Declining values of commercial real estate or higher market interest rates may adversely affect the ability of borrowers whose loans are maturing to satisfy applicable loan to value ratios required to renew the loans.
- 38 -
Nonperforming Assets 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 periods shown:
| | | March 31, 2011 | | Dec. 31, 2010 | | Sept. 30, 2010 | | Jun. 30, 2010 | | Mar. 31, 2010 |
| | | | | | | Percent of | | | | | | | | | | | | | | | | |
| | | | | | | loan | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Amount | | category | | Amount | | Amount | | Amount | | Amount |
| Commercial loans | | $ | 12,803 | | | 4.2 | % | | $ | 13,377 | | | $ | 13,319 | | | $ | 15,317 | | | $ | 24,856 | |
| Real estate construction loans: | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate construction | | | 4,032 | | | 22.8 | % | | | 4,077 | | | | 3,391 | | | | 3,391 | | | | 3,939 | |
| Residential real estate construction | | | 4,093 | | | 20.6 | % | | | 6,615 | | | | 13,316 | | | | 19,465 | | | | 19,776 | |
| Total real estate construction loans | | | 8,125 | | | 21.6 | % | | | 10,692 | | | | 16,707 | | | | 22,856 | | | | 23,715 | |
| Real estate mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage | | | 5,714 | | | 9.0 | % | | | 9,318 | | | | 13,040 | | | | 14,535 | | | | 9,829 | |
| Nonstandard mortgage product | | | 6,451 | | | 57.9 | % | | | 5,223 | | | | 5,150 | | | | 6,121 | | | | 9,327 | |
| Home equity loans and lines of credit | | | 1,426 | | | 0.5 | % | | | 950 | | | | 1,538 | | | | 2,198 | | | | 2,248 | |
| Total real estate mortgage loans | | | 13,591 | | | 4.0 | % | | | 15,491 | | | | 19,728 | | | | 22,854 | | | | 21,404 | |
| Commercial real estate loans | | | 19,424 | | | 2.3 | % | | | 21,671 | | | | 18,792 | | | | 17,542 | | | | 15,322 | |
| Installment and other consumer loans | | | - | | | 0.0 | % | | | - | | | | - | | | | 74 | | | | 172 | |
| Total nonaccrual loans | | | 53,943 | | | 3.5 | % | | | 61,231 | | | | 68,546 | | | | 78,643 | | | | 85,469 | |
| 90 day past due and accruing interest | | | - | | | | | | | - | | | | - | | | | - | | | | - | |
| Total nonperforming loans | | | 53,943 | | | 3.5 | % | | | 61,231 | | | | 68,546 | | | | 78,643 | | | | 85,469 | |
| Other real estate owned | | | 39,329 | | | | | | | 39,459 | | | | 35,814 | | | | 37,578 | | | | 45,238 | |
| Total nonperforming assets | | $ | 93,272 | | | | | | $ | 100,690 | | | $ | 104,360 | | | $ | 116,221 | | | $ | 130,707 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Nonperforming loans to total loans | | | 3.51 | % | | | | | | 3.99 | % | | | 4.35 | % | | | 4.91 | % | | | 5.13 | % |
| Nonperforming assets to total assets | | | 3.80 | % | | | | | | 4.09 | % | | | 4.20 | % | | | 4.64 | % | | | 4.91 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Delinquent loans 30-89 days past due | | $ | 4,901 | | | | | | $ | 2,721 | | | $ | 5,502 | | | $ | 2,743 | | | $ | 5,566 | |
| Delinquent loans to total loans | | | 0.32 | % | | | | | | 0.18 | % | | | 0.35 | % | | | 0.17 | % | | | 0.33 | % |
At March 31, 2011, total nonperforming assets were $93.3 million, or 3.80% of total assets, compared to $100.7 million, or 4.09%, at December 31, 2010, and $130.7 million or 4.91% a year ago. Nonperforming assets have declined for eight consecutive quarters and were down 29% from March 31, 2010. The balance of total nonperforming assets at quarter end reflected write-downs totaling $49.4 million or 35% from the original principal loan balance compared to write-downs of 38% twelve months ago.
Over the past year, total nonaccrual loans declined $31.5 million or 37% to $53.9 million at March 31, 2011. The reduction was largely due to the Company taking ownership of additional residential and commercial properties related to loans which previously were on nonaccrual status, nonaccrual loan payoffs, charge-offs, and the disposition of certain large nonaccrual commercial loans. Over the past year, nonaccrual commercial, residential real estate construction and real estate mortgage loans declined and more than offset the increase in nonaccrual commercial real estate loans. At March 31, 2011, the total nonaccrual loan portfolio had been written down 21% from the original principal balance compared to 29% at the end of the first quarter a year ago.
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OREO. 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 2010: | | | | | | | | |
| Beginning balance January 1, 2010 | | $ | 53,594 | | | | 672 | |
| Additions to OREO | | | 25,199 | | | | 123 | |
| Capitalized improvements | | | 3,185 | | | | - | |
| Valuation adjustments | | | (6,649 | ) | | | - | |
| Disposition of OREO properties | | | (35,870 | ) | | | (393 | ) |
| Ending balance December 31, 2010 | | $ | 39,459 | | | | 402 | |
| | | | | | | | | |
| First Quarter 2011 | | | | | | | | |
| Additions to OREO | | $ | 6,354 | | | | 25 | |
| Capitalized improvements | | | 125 | | | | - | |
| Valuation adjustments | | | (657 | ) | | | - | |
| Disposition of OREO properties | | | (5,952 | ) | | | (28 | ) |
| Ending balance March 31, 2011 | | $ | 39,329 | | | | 399 | |
| | | | | | | | | |
The Company remained focused on OREO property disposition activities. During the first quarter 2011 the Company disposed of $6.0 million in OREO property. At March 31, 2011, the OREO portfolio consisted of 399 properties valued at $39.3 million. The quarter end OREO balance reflected write-downs totaling 48% from the original loan principal compared to 50% twelve months ago. The largest balances in the OREO portfolio at March 31, 2011, were attributable to homes, followed by residential site development projects and income producing properties, all of which are located within regions we operate. 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 2010 10-K.
The following table presents segments of the OREO portfolio for the periods shown:
| (Dollars in thousands) | | March 31, | | # of | | Dec. 31, | | # of | | September 30, | | # of |
| | | 2011 | | properties | | 2010 | | properties | | 2010 | | properties |
| Homes | | $ | 15,093 | | | 64 | | $ | 17,297 | | | 69 | | $ | 15,341 | | | 66 |
| Residential site developments | | | 6,973 | | | 236 | | | 7,340 | | | 245 | | | 8,096 | | | 281 |
| Lots | | | 3,758 | | | 56 | | | 3,700 | | | 56 | | | 4,062 | | | 61 |
| Land | | | 4,427 | | | 11 | | | 5,135 | | | 12 | | | 3,525 | | | 10 |
| Income producing properties | | | 6,613 | | | 9 | | | 5,162 | | | 7 | | | 3,212 | | | 7 |
| Condominiums | | | 1,792 | | | 12 | | | 128 | | | 2 | | | 881 | | | 12 |
| Multifamily | | | 673 | | | 11 | | | 697 | | | 11 | | | 697 | | | 11 |
| Total | | $ | 39,329 | | | 399 | | $ | 39,459 | | | 402 | | $ | 35,814 | | | 448 |
| | | | | | | | | | | | | | | | | | | |
Expenses from the acquisition, maintenance and disposition of OREO properties are included in other noninterest expense in the statements of income (loss.) Our operating results will be impacted by our ability to dispose of OREO properties at prices that are in line with current valuation expectations. Continued decline in real estate market values in our area would lead to additional OREO valuation adjustments or losses upon final disposal, which would have an adverse effect on our results of operations.
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Delinquencies. Bancorp also monitors delinquencies, defined as loan balances 30-89 days past due, not on nonaccrual status, as an indicator of future nonperforming assets. Total delinquencies were $4.9 million or .32% of total loans at March 31, 2011, up from $2.7 million or .18% at December 31, 2010, and a reduction from $5.6 million or .33% at March 31, 2010.
The following table summarizes total delinquent loan balances by type of loan as of the dates shown:
| (Dollars in thousands) | | March 31, 2011 | | December 31, 2010 | | March 31, 2010 |
| | | | | | | 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 | | $ | 797 | | | | 0.26 | % | | $ | 52 | | | | 0.02 | % | | $ | 341 | | | | 0.10 | % |
| Real estate construction | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 604 | | | | 0.72 | % |
| Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 398 | | | | 0.62 | % | | | 409 | | | | 0.01 | % | | | 402 | | | | 0.54 | % |
Nonstandard mortgage product | | | - | | | | 0.00 | % | | | 945 | | | | 0.08 | % | | | 1,026 | | | | 5.63 | % |
Home equity loans and lines of credit | | | 562 | | | | 0.21 | % | | | 708 | | | | 0.00 | % | | | 527 | | | | 0.19 | % |
| Total real estate mortgage | | | 960 | | | | 0.28 | % | | | 2,062 | | | | 0.59 | % | | | 1,955 | | | | 0.53 | % |
| Commercial real estate | | | 2,988 | | | | 0.36 | % | | | 555 | | | | 0.07 | % | | | 2,552 | | | | 0.30 | % |
| Installment and consumer | | | 156 | | | | 1.06 | % | | | 52 | | | | 0.34 | % | | | 114 | | | | 0.69 | % |
| Total loans 30-89 days past due, not in nonaccrual status | | $ | 4,901 | | | | | | | $ | 2,721 | | | | | | | $ | 5,566 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Delinquent loans past due 30-89 days to total loans | | | 0.32 | % | | | | | | | 0.18 | % | | | | | | | 0.33 | % | | | | |
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 2010 10-K.
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The following table is a summary of activity in the allowance for credit losses for the periods presented:
| | | March 31, | | Dec. 31, | | Sep. 30, | | June 30, | | Mar. 31, |
| (Dollars in thousands) | | 2011 | | 2010 | | 2010 | | 2010 | | 2010 |
| Loans outstanding at end of period | | $ | 1,535,700 | | | $ | 1,536,270 | | | $ | 1,575,451 | | | $ | 1,602,032 | | | $ | 1,666,933 | |
| Average loans outstanding during the period | | | 1,529,290 | | | | 1,556,975 | | | | 1,586,849 | | | | 1,645,189 | | | | 1,702,763 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses, beginning of period | | | 41,067 | | | | 42,618 | | | | 44,347 | | | | 41,299 | | | | 39,418 | |
| Total provision for credit losses | | | 2,076 | | | | 1,693 | | | | 1,567 | | | | 7,758 | | | | 7,634 | |
| Loan charge-offs: | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | (761 | ) | | | (1,268 | ) | | | (713 | ) | | | (2,003 | ) | | | (1,245 | ) |
| Commercial real estate construction | | | (65 | ) | | | (76 | ) | | | - | | | | (248 | ) | | | (487 | ) |
| Residential real estate construction | | | (311 | ) | | | (471 | ) | | | (906 | ) | | | (513 | ) | | | (875 | ) |
| Total real estate construction | | | (376 | ) | | | (547 | ) | | | (906 | ) | | | (761 | ) | | | (1,362 | ) |
| | | (310 | ) | | | (533 | ) | | | (450 | ) | | | (515 | ) | | | (932 | ) |
| | | (316 | ) | | | (77 | ) | | | (7 | ) | | | (643 | ) | | | (1,497 | ) |
Home equity lines of credit | | | (859 | ) | | | (673 | ) | | | (572 | ) | | | (631 | ) | | | (931 | ) |
| Total real estate mortgage | | | (1,485 | ) | | | (1,283 | ) | | | (1,029 | ) | | | (1,789 | ) | | | (3,360 | ) |
| Commercial real estate | | | (329 | ) | | | (587 | ) | | | (343 | ) | | | (288 | ) | | | (103 | ) |
| Installment and consumer | | | (176 | ) | | | (69 | ) | | | (288 | ) | | | (179 | ) | | | (170 | ) |
| Overdraft | | | (287 | ) | | | (382 | ) | | | (399 | ) | | | (216 | ) | | | (186 | ) |
| Total loan charge-offs | | | (3,414 | ) | | | (4,136 | ) | | | (3,678 | ) | | | (5,236 | ) | | | (6,426 | ) |
| Recoveries: | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 498 | | | | 159 | | | | 189 | | | | 319 | | | | 406 | |
| Commercial real estate construction | | | - | | | | - | | | | - | | | | - | | | | - | |
| Residential real estate construction | | | - | | | | 382 | | | | 93 | | | | 81 | | | | 141 | |
| Total real estate construction | | | - | | | | 382 | | | | 93 | | | | 81 | | | | 141 | |
Mortgage | | | 105 | | | | 186 | | | | 1 | | | | 37 | | | | 23 | |
Nonstandard mortgage | | | 1 | | | | 1 | | | | 2 | | | | 2 | | | | - | |
Home equity loans and lines of credit | | | 6 | | | | 103 | | | | 4 | | | | 4 | | | | 17 | |
| Total real estate mortgage | | | 112 | | | | 290 | | | | 7 | | | | 43 | | | | 40 | |
| Commercial real estate | | | 3 | | | | 3 | | | | 4 | | | | 13 | | | | 8 | |
| Installment and consumer | | | 8 | | | | 10 | | | | 16 | | | | 33 | | | | 33 | |
| Overdraft | | | 79 | | | | 48 | | | | 73 | | | | 37 | | | | 45 | |
| Total recoveries | | | 700 | | | | 892 | | | | 382 | | | | 526 | | | | 673 | |
| Net loan charge-offs | | | (2,714 | ) | | | (3,244 | ) | | | (3,296 | ) | | | (4,710 | ) | | | (5,753 | ) |
| Allowance for credit losses, end of period | | $ | 40,429 | | | $ | 41,067 | | | $ | 42,618 | | | $ | 44,347 | | | $ | 41,299 | |
| | | | | | | | | | | | | | | | | | | | | |
| Components of allowance for credit losses | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | $ | 39,692 | | | $ | 40,217 | | | $ | 41,753 | | | $ | 43,329 | | | $ | 40,446 | |
| Reserve for unfunded commitments | | | 737 | | | | 850 | | | | 865 | | | | 1,018 | | | | 853 | |
| Total allowance for credit losses | | $ | 40,429 | | | $ | 41,067 | | | $ | 42,618 | | | $ | 44,347 | | | $ | 41,299 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net loan charge-offs to average loans annualized | | | 0.72 | % | | | 0.83 | % | | | 0.82 | % | | | 1.15 | % | | | 1.37 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses to total loans | | | 2.58 | % | | | 2.62 | % | | | 2.65 | % | | | 2.70 | % | | | 2.43 | % |
| Allowance for credit losses to total loans | | | 2.63 | % | | | 2.67 | % | | | 2.71 | % | | | 2.77 | % | | | 2.48 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses to nonperforming loans | | | 74 | % | | | 66 | % | | | 61 | % | | | 55 | % | | | 47 | % |
| Allowance for credit losses to nonperforming loans | | | 75 | % | | | 67 | % | | | 62 | % | | | 56 | % | | | 48 | % |
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At March 31, 2011, the Company’s allowance for credit losses was $40.4 million, consisting of a $33.6 million formula allowance, a $5.7 million unallocated allowance, a $.4 million specific allowance and a $.7 million reserve for unfunded commitments. At December 31, 2010, our allowance for credit losses was $41.1 million, consisting of a $33.5 million formula allowance, a $6.2 million unallocated allowance, a $.6 million specific allowance and a $.8 million reserve for unfunded commitments. The reserve for unfunded commitments was included in other liabilities as of March 31, 2011, and December 31, 2010. At March 31, 2011, the allowance for credit losses was 2.63% of total loans, a decrease from 2.67% at December 31, 2010. At March 31, 2011, the allowance for credit losses was 75% to nonperforming loans, as compared to 67% at December 31, 2010.
Overall, we believe that the allowance for credit losses is adequate to absorb losses in the loan portfolio at March 31, 2011, although there can be no assurance that future loan losses will not exceed our current estimates. The process for determining the adequacy of the allowance for credit losses is critical to our financial results. Please see Item 1A “Risk Factors” in our 2010 10-K.
Net Loan Charge-offs. For the quarter ended March 31, 2011, total net loan charge-offs were $2.7 million compared to $3.2 million in the fourth quarter 2010, and $5.8 million in the first quarter 2010. The year over year first quarter reduction in net charge-offs was concentrated in the real estate mortgage, residential real estate construction, and commercial loan categories. First quarter 2011 annualized net loan charge-offs to total average loans outstanding was .72%, a reduction from 1.37% in the first quarter 2010.
Deposits and Borrowings
The following table summarizes the quarterly average dollar amount in, and the average interest rate paid on, each of the deposit and borrowing categories for the first quarters of 2011 and 2010 and fourth quarter 2010:
| | | First Quarter 2011 | | Fourth Quarter 2010 | | First Quarter 2010 |
| | | 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 | | $ | 552,229 | | | 28.6 | % | | | - | | | $ | 566,998 | | | 28.8 | % | | | - | | | $ | 519,492 | | | 24.9 | % | | | - | |
| Interest bearing demand | | | 344,090 | | | 17.8 | % | | | 0.09 | % | | | 349,071 | | | 17.7 | % | | | 0.09 | % | | | 321,070 | | | 15.4 | % | | | 0.20 | % |
| Savings | | | 106,309 | | | 5.5 | % | | | 0.15 | % | | | 105,114 | | | 5.3 | % | | | 0.16 | % | | | 98,075 | | | 4.7 | % | | | 0.49 | % |
| Money market | | | 660,672 | | | 34.2 | % | | | 0.39 | % | | | 670,581 | | | 34.0 | % | | | 0.42 | % | | | 642,594 | | | 30.8 | % | | | 0.85 | % |
| Time deposits | | | 269,038 | | | 13.9 | % | | | 1.59 | % | | | 281,008 | | | 14.2 | % | | | 1.66 | % | | | 507,705 | | | 24.3 | % | | | 2.14 | % |
| Total deposits | | | 1,932,338 | | | 100.0 | % | | | 0.38 | % | | | 1,972,772 | | | 100.0 | % | | | 0.40 | % | | | 2,088,936 | | | 100.0 | % | | | 0.83 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | - | | | | | | | 0.00 | % | | | - | | | | | | | 0.00 | % | | | 13,100 | | | | | | | 4.49 | % |
| Long-term borrowings 1 | | | 219,599 | | | | | | | 2.95 | % | | | 217,256 | | | | | | | 2.94 | % | | | 301,199 | | | | | | | 3.01 | % |
| Total borrowings | | | 219,599 | | | | | | | 2.95 | % | | | 217,256 | | | | | | | 2.94 | % | | | 314,299 | | | | | | | 2.93 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total deposits and borrowings | | $ | 2,151,937 | | | | | | | 0.86 | % | | $ | 2,190,028 | | | | | | | 0.88 | % | | $ | 2,403,235 | | | | | | | 1.41 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1 | Long-term borrowings include junior subordinated debentures. |
First quarter 2011 average total deposits of $1.93 billion declined 7% or $156.6 million from the same quarter in 2010. This was mainly due to the decision to continue to reduce higher cost time deposit balances, which declined $238.7 million or 47% from the same quarter last year. Time deposits represented just 14% of the Company’s average total deposits in the most recent quarter. The combination of the Company’s favorable deposit mix and recent deposit pricing strategies helped reduce the average rate paid on total deposits to .38% in first quarter 2011, representing a decline of 45 basis points from 0.83% in same quarter 2010. Whether we will continue to be successful maintaining or growing our low cost deposit base will depend on various factors, including deposit pricing strategies, the effects of competition, client behavior, and regulatory changes and requirements.
At March 31, 2011, total brokered deposits were insignificant at $7.7 million, compared to $30.4 million at December 31, 2010, and $63.0 million at March 31, 2010. Brokered deposits are currently not being replaced as they mature.
The average balance of long-term borrowings decreased by $81.6 million to $219.6 million in the quarter ended March 31, 2011, from the same period last year due to the prepayment of about $99.1 million of FHLB borrowings in the second quarter 2010.
At March 31, 2011, the balance of junior subordinated debentures issued in connection with our prior issuances of trust preferred securities was $51.0 million, unchanged from March 31, 2010. At March 31, 2011, the Company had a balance in other liabilities of $2.1 million in accrued and unpaid interest expense on these junior subordinated debentures and it may not pay dividends on its capital stock until all such accrued but unpaid interest has been paid in full. Under the December 2009 Written Agreement with the DFCS and the Federal Reserve Bank (“Reserve Bank”), we cannot resume interest payments on our trust preferred securities without prior regulatory approval. For additional detail regarding Bancorp’s outstanding debentures, see Note 9 in the financial statements included under Item 1 of this report.
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Capital Resources
The Board of Governors of the Federal Reserve System (“Federal Reserve”) and the FDIC have established minimum requirements for capital adequacy for bank holding companies and state non-member banks. For more information on these topics, see the discussions under the subheadings “Capital Adequacy Requirements” in the section “Supervision and Regulation” included in Item 1 of the Company’s 2010 10-K. The following table summarizes the capital measures of Bancorp and the Bank at March 31, 2011:
| | | West Coast Bancorp | | | West Coast Bank | | Minimum requirements |
| (Dollars in thousands) | | March 31, | | December 31, | | March 31, | | December 31, | | Adequately | | Well |
| | | 2011 | | 2010 | | | 2010 | | | | 2011 | | 2010 | | 2010 | | Capitalized | | Capitalized |
| Tier 1 risk-based capital ratio | | | 17.71 | % | | | 15.88 | % | | | 17.47 | % | | | | 17.02 | % | | | 15.24 | % | | | 16.79 | % | | | 4.00 | % | | | 6.00 | % |
| Total risk-based capital ratio | | | 18.98 | % | | | 17.14 | % | | | 18.74 | % | | | | 18.28 | % | | | 16.50 | % | | | 18.05 | % | | | 8.00 | % | | | 10.00 | % |
| Leverage ratio | | | 13.40 | % | | | 11.57 | % | | | 13.02 | % | | | | 12.87 | % | | | 11.16 | % | | | 12.51 | % | | | 4.00 | % | | | 5.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total stockholders' equity | | $ | 276,988 | | | $ | 260,497 | | | $ | 272,560 | | | | $ | 314,632 | | | $ | 299,997 | | | $ | 310,487 | | | | | | | | | |
Bancorp’s total risk-based capital ratio improved to 18.98% at March 31, 2011, from 18.74% at December 31, 2010, and 17.14% at March 31, 2010, while Bancorp's Tier 1 risk-based capital ratio increased to 17.71% at current quarter end, from 17.47% at year end 2010 and 15.88% at March 31, 2010. The combination of the Company returning to profitability and a continued reduction in risk weighted assets over the past year continued to strengthen the Company’s capital position. The total risk-based capital ratio at the Bank improved to 18.28% at March 31, 2011, from 18.05% at year end 2010, and 16.50% at March 31, 2010, while the Bank’s Tier 1 risk-based capital ratio increased to 17.02% from 16.79% and 15.24% at those same dates. The leverage ratio at the Bank improved to 12.87% at March 31, 2011, from 11.16% at March 31, 2010.
The total risk based capital ratios of Bancorp include $51.0 million of junior subordinated debentures which qualified as Tier 1 capital at March 31, 2011, under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, which was signed into law on July 21, 2010, Bancorp expects to continue to rely on these junior subordinated debentures as part of its regulatory capital. However, at this point, Bancorp does not expect to issue additional junior subordinated debentures as any future issued junior subordinated debentures would not qualify as Tier 1 total capital under the same Act.
Bancorp’s stockholders’ equity was $277.0 million at March 31, 2011, up from $272.6 million at year end 2010 and $260.5 million at March 31, 2010. Bancorp may take steps to raise additional capital in the future. To do so, Bancorp may offer and issue qualifying equity or debt instruments. 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.
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Liquidity and Sources of Funds
The Bank’s sources of funds include customer deposits, loan repayments, advances from the FHLB, maturities of investment securities, sales of “Available for Sale” securities, loan and OREO sales, net income, if any, loans taken out at the Reserve Bank discount window, and the use of Federal Funds markets. 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 sales, and unscheduled loan prepayments are influenced by general interest rate levels, interest rates available on other investments, competition, market and general economic conditions and other factors.
Deposits are our primary source of funds, and at March 31, 2011, our loan to deposit ratio was 80%, a slight decline from 81% at March 31, 2010. Lower loan balances caused the collective balance of interest bearing deposits at the Reserve Bank and investment securities portfolio of $767.9 million to account for a significant 33% of total earning assets at March 31, 2011. In light of our substantial liquidity position, a portion of which is funded at a higher cost of funds than amounts being earned and therefore has an adverse impact on net interest income and operating results, we continued to reduce brokered, internet, and other term deposits during the most recent quarter.
The following table summarizes the primary liquidity and non-core liability ratios. The primary liquidity ratio represents the sum of net cash, short-term and marketable assets divided by the sum of net deposits and short-term liabilities. The net non-core funding dependency ratio is non-core liabilities less short-term investments divided by long-term assets. The Company’s primary and net non-core funding dependency ratios remained strong at quarter end:
| | | March 31, | | December 31, |
| | | 2011 | | 2010 |
| Primary liquidity | | | 45 | % | | | 37 | % |
| Net non-core funding dependency | | | 5 | % | | | 6 | % |
At March 31, 2011, the Bank had outstanding borrowings of $168.6 million, against its $551.8 million in established borrowing capacity with the FHLB, as compared to $168.6 million outstanding against its $673.0 million in established borrowing capacity at December 31, 2010. 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 $34.6 million at March 31, 2011, with no balance outstanding at either March 31, 2011, or December 31, 2010. The Reserve Bank line is subject to collateral requirements.
On December 15, 2009, Bancorp entered into a Written Agreement with the Reserve Bank and DFCS. For detailed discussion of the Written Agreement that may affect our business, see Item 1, “Business – Current Regulatory Actions” in our 2010 10-K. Under the Written Agreement, Bancorp may not directly or indirectly take dividends or other forms of payment representing a reduction in capital from the Bank without the prior written approval of the Reserve Bank and the DFCS. Also, under our Memorandum of Understanding, the Bank may not pay dividends to the holding company without the consent of the FDIC and the DFCS. At March 31, 2011, the holding company did not have any borrowing arrangements of its own.
Off-Balance Sheet Arrangements
At March 31, 2011, the Bank had commitments to extend credit of $573.5 million, which was up .3% compared to $571.6 million at December 31, 2010. For additional information regarding off balance sheet arrangements and future financial commitments, see Note 7 “Commitments and Contingent Liabilities” in the financial statements included under Item 1 of this report.
Critical Accounting Policies
Management has identified as our most critical accounting policies, the calculation of our allowance for credit losses, valuation of OREO, and estimates relating to income taxes. Each of these policies are discussed in our 2010 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies.”
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the market risks disclosure under Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2010 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and accumulated and communicated to our management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. Our management has evaluated, with the participation and under the supervision of our CEO and CFO, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO have concluded that, as of such date, the Company’s disclosure controls and procedures are effective in ensuring that information relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On June 24, 2009, West Coast Trust was served with an Objection to Personal Representative's Petition and Petition for Surcharge of Personal Representative in Linn County Circuit Court. The petition was filed by the beneficiaries of the estate of Archie Q. Adams, for which West Coast Trust acts as the personal representative. The petitioners allege a breach of fiduciary duty with respect to West Coast Trust's prior sale of real property owned by the Adams estate and sought relief in the form of a surcharge to West Coast Trust of $215,573,115.60, the amount of the alleged loss to the estate. West Coast Trust filed a motion to dismiss on July 2, 2009, which was granted in a letter ruling dated September 15, 2009. Petitioners appealed and briefs have been filed. The Company believes the appeal and underlying petition are without merit.
Item 1A. Risk Factors
For detailed discussion of risks that may affect our business, see Item 1A, “Risk Factors” in our 2010 10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (a) | | None |
| |
| (b) | | None |
| |
| (c) | | The following table provides information about repurchases of common stock by the Company during the quarter ended March 31, 2011: |
| |
| | | | | | | | | Total Number of Shares | | | |
| | | | | | | | | Purchased as Part of Publicly | | Maximum Number of Shares Remaining |
| | | Total Number of Shares | | Average Price Paid | | Announced Plans or Programs | | at Period End that May Be Purchased |
| Period | | Purchased (1) | | per Share | | (2) | | Under the Plans or Programs |
| 1/1/11 - 1/31/11 | | | 3,008 | | $ | 3.19 | | - | | | 1,051,821 |
| 2/1/11 - 2/28/11 | | | - | | $ | 0.00 | | - | | | 1,051,821 |
| 3/1/11 - 3/31/11 | | | 15 | | $ | 3.36 | | - | | | 1,051,821 |
| Total for quarter | | | 3,023 | | | | | - | | | |
| | (1) | | Shares repurchased by Bancorp during the quarter include shares acquired from employees in connection with stock option exercises and cancellation of restricted stock to pay withholding taxes totaling 3,008 shares, 0 shares, and 15 shares, respectively, for the periods indicated. There were no shares repurchased in the periods indicated pursuant to the Company’s corporate stock repurchase program publicly announced in July 2000 (the “Repurchase Program”) and described in note 2 below. |
| | | | |
| | (2) | | Under the Repurchase Program, the board of directors originally authorized the Company to repurchase up to 330,000 common shares, which amount was increased by 550,000 shares in September 2000, by 1.0 million shares in September 2001, by 1.0 million shares in September 2002, by 1.0 million shares in April 2004, and by 1.0 million shares in September 2007 for a total authorized repurchase amount as of March 31, 2011, of approximately 4.9 million shares. |
| | |
Item 3. Defaults Upon Senior Securities
None
Item 4. [Reserved]
Item 5. Other Information
None
Item 6. Exhibits
| | Exhibit No. | | Exhibit | |
| | 31.1 | | Certification of CEO under Rule 13(a) – 14(a) of the Exchange Act. |
| | | | |
| | 31.2 | | Certification of CFO under Rule 13(a) – 14(a) of the Exchange Act. |
| | | | |
| | 32 | | Certification of CEO and CFO under 18 U.S.C. Section 1350. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | WEST COAST BANCORP |
| | (Registrant) |
| | |
| | |
| Dated: April 25, 2011 | /s/ Robert D. Sznewajs |
| | Robert D. Sznewajs |
| | President and Chief Executive Officer |
| | |
| | |
| Dated: April 25, 2011 | /s/ Anders Giltvedt |
| | Anders Giltvedt |
| | Executive Vice President and Chief Financial Officer |
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