Subsidiaries
West Coast Bank
The Bank was organized in 1925 under
the name The Bank of Newport and its head office is currently located in Lake
Oswego, Oregon. The Bank resulted from the merger on December 31, 1998, of the
Bank of Newport of Newport, Oregon, The Commercial Bank of Salem, Oregon, Bank
of Vancouver of Vancouver, Washington and Centennial Bank of Olympia,
Washington, into a single entity, which was named West Coast Bank.
The Bank conducts business through
64 full and limited service branches located in western Oregon and southwestern
Washington. The Oregon branches are located in the following cities and towns:
Beaverton, Bend (2), Canby, Clackamas, Dallas, Depoe Bay, Eugene (2), Forest
Grove, Gresham, Happy Valley, Hillsboro (2), Keizer (3), King City, Lake Oswego,
Lincoln City, McMinnville, Molalla, Monmouth, Mt. Angel, Newberg, Newport (2),
North Plains, Oregon City, Portland (5), Salem (5), Silverton, Stayton,
Sublimity, Tigard, Toledo, Tualatin, Waldport, Wilsonville (2) and Woodburn (3).
The Bank’s Washington branches are located in Centralia, Chehalis, Hoodsport,
Lacey (2), Olympia (2), Shelton, Tukwila and Vancouver (4). On January 5, 2009,
we opened a new branch in Dundee, Oregon, which increased our total number of
branches to 65.
The primary business strategy of the
Bank is to provide comprehensive banking and related financial services tailored
to individuals, professionals and businesses. The Bank emphasizes the diversity
of its product lines and convenient access typically associated with larger
financial organizations, while maintaining the local decision making authority,
market knowledge and customer service orientation typically associated with a
community bank. The Bank has significant focus on four targeted areas: 1) high
value consumers (including the mature market), 2) small businesses that desire
streamlined packaged products, 3) commercial businesses that benefit from
customized lending, depository and investment solutions and 4) real estate
finance including construction of commercial and residential projects in
addition to permanent financing for income producing properties. Due to
significant disruptions in the real estate market in the areas in which the Bank
does business, the Bank has significantly reduced lending related to real estate
construction, and particularly residential construction.
For
consumer banking customers, the Bank offers a variety of flexible checking and
savings accounts and check cards, as well as competitive borrowing products,
such as personal lines of credit, credit cards and a variety of first and second
lien residential mortgage products and other types of consumer loans. The
consumer products consist of free checking and six other account types, each
specifically designed to meet the needs of a unique market segment. The small
business package of deposit accounts includes free business checking and an
interest-bearing account for eligible organizations. Because of the
straightforward and streamlined product design, our personal bankers are able to
quickly and easily identify the best account for our clients. Customers have
access to the Bank’s products and services through a variety of convenient
channels such as 24 hour 7 days a week automated phone and internet access, a
personal customer service center accessed by phone, ATMs (both shared and
proprietary networks), as well as through our branch locations.
For
business banking customers, the Bank offers customized deposit products tailored
for specific needs, including a variety of checking accounts, sophisticated
internet-based cash management, iDeposit, a remote deposit service that allows
business customers to make deposits electronically, and a full array of
investment services, all with online and/or CD-ROM information reporting.
Customized financing packages provide businesses with a comprehensive suite of
credit facilities that include general commercial purpose loans (short and
intermediate term), revolving lines of credit, real estate loans and lines to
support construction, owner-occupied and investor financing and SBA loans. The
Bank also offers business credit cards (VISA) and equipment leasing through
vendor alliances and other types of business credit.
The principal office of the Bank is
at 5335 Meadows Road, Suite 201, Lake Oswego, OR 97035, (503) 684-0884.
West Coast Trust
West
Coast Trust provides trust services and life insurance products to individuals,
for-profit and not for-profit businesses and institutions. West Coast Trust acts
as fiduciary of estates and conservatorships, and as a trustee under various
wills, trusts, and pension and profit-sharing plans. The main office of West
Coast Trust is located at 1000 SW Broadway, Suite 1100, Portland, Oregon 97205,
(503) 279-3911.
Totten, Inc.
Totten, Inc., a
Washington corporation, serves as trustee under deeds of trust and holds certain
real estate licenses.
4
West Coast Statutory Trusts III, IV,
V, VI, VII and VIII
West Coast Statutory Trusts III, IV,
V, VI, VII and VIII are wholly-owned subsidiary trusts of Bancorp formed to
facilitate the issuance of Pooled Trust Preferred Securities (“trust preferred
securities”). The trusts were organized in September 2003, March 2004, April
2006, December 2006, March 2007 and June 2007 respectively, in connection with
six offerings of trust preferred securities. For more information regarding
Bancorp’s issuance of trust preferred securities, see Note 11 “Junior
Subordinated Debentures” to the Company’s audited financial statements included
under “Financial Statements and Supplementary Data” in Item 8 of this report.
Employees
At December 31, 2008, Bancorp and
its subsidiaries had approximately 800 employees. None of these employees are
represented by labor unions and management believes that Bancorp’s relationship
with its employees is good. Bancorp emphasizes a positive work environment for
its employees and our work environment is measured annually utilizing an
anonymous employee survey. Results continue to indicate a high level of employee
satisfaction. West Coast Bank has been recognized as one of Oregon’s Best 100
Companies for which to work in each of the last five years. Management
continually strives to retain top talent as well as provide career development
opportunities to enhance skill levels. A number of benefit programs are
available to eligible employees.
Competition
Commercial banking in the state of Oregon and southwest Washington is
highly competitive with respect to providing banking services, including making
loans and attracting deposits. The Bank competes with other banks, as well as
with savings and loan associations, savings banks, credit unions, mortgage
companies, investment banks, insurance companies, securities brokerages and
other financial institutions. Banking in Oregon and Washington is dominated by
several significant banking institutions, including U.S. Bank, Wells Fargo Bank
and Bank of America, which together account for a majority of the total
commercial and savings bank loans and deposits in Oregon and Washington. These
competitors have significantly greater financial resources and offer a greater
number of branch locations (with statewide branch networks), higher lending
limits, and a variety of services not offered by the Bank. Bancorp has attempted
to offset some of the advantages of the larger competitors by arranging
participations with other banks for loans above its legal lending limits, as
well as leveraging technology and third party arrangements to deliver
contemporary product solutions and better compete in targeted customer
segments.
Bancorp
has positioned itself successfully as a local alternative to banking
conglomerates that may be perceived by customers or potential customers to be
impersonal, out-of-touch with the community, or simply not interested in
providing banking services to some of Bancorp’s target customers.
In
addition to larger institutions, numerous “community” banks and credit unions
have been formed, expanded, or moved into Bancorp’s market areas and have
developed a similar focus to Bancorp. These institutions have further increased
competition, particularly in the Portland metropolitan area, where Bancorp has
enjoyed significant growth in past years and focused much of its expansion
efforts. This growing number of similar financial institutions and an increased
focus by larger institutions on the Bank’s market segments in response to
declining market perception and/or market share has led to intensified
competition in all aspects of Bancorp’s business.
The financial services industry has
experienced widespread consolidation over the last decade. Bancorp anticipates
that consolidation among financial institutions in its market areas will
continue and perhaps accelerate as a result of the severe financial distress in
the industry. It is possible that Bancorp will seek acquisition opportunities in
markets of strategic importance to it from time to time, if its financial
condition permits. However, other financial institutions aggressively compete
against Bancorp in the acquisition market. Many of these institutions have
greater resources, better access to capital markets, larger cash reserves and
stock for use in acquisitions that is more liquid and more highly valued by the
market.
5
Supervision and
Regulation
Introduction
Bancorp
is an Oregon corporation headquartered in Lake Oswego, Oregon, and is registered
with the Federal Reserve as a bank holding company. The Bank is an Oregon state
bank and is not a member of the Federal Reserve System. The Bank’s primary
federal regulator is the FDIC.
The laws
and regulations applicable to Bancorp and its subsidiaries are primarily
intended to protect borrowers and depositors of the Bank and not stockholders of
Bancorp. Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. In the current economic climate and
regulatory environment, the likelihood of enactment of new banking legislation
and promulgation of new banking regulations is greater than it has been in
recent years. The potential impact of new laws and regulations on Bancorp and
its subsidiaries cannot be determined, but any such laws and regulations may
materially affect the business and prospects of Bancorp and its subsidiaries.
Violation of the laws and regulations applicable to Bancorp and its subsidiaries
may result in assessment of substantial civil monetary penalties, the imposition
of a cease and desist order, and other regulatory sanctions or restrictions.
The following is a brief description
of the significant laws and regulations that govern our activities.
Bank Holding Company Regulation
As a
registered bank holding company, Bancorp is subject to the supervision of, and
regular inspection by, the Federal Reserve pursuant to the Bank Holding Company
Act of 1956, as amended (the “BHCA”). Bancorp must file reports with the Federal
Reserve and must provide it with such additional information as it may require.
The BHCA restricts the direct and indirect activities of Bancorp to banking,
managing or controlling banks and other subsidiaries authorized under the BHCA,
and activities that are closely related to banking or managing or controlling
banks. Bank holding companies like Bancorp must, among other things, obtain
prior Federal Reserve approval before they: (1) acquire direct or indirect
ownership or control of any voting shares of any bank or bank holding company
that results in total ownership or control, directly or indirectly, of more than
5% of the outstanding shares of any class of voting securities of such bank or
bank holding company; (2) merge or consolidate with another bank holding
company; or (3) acquire substantially all of the assets of another bank or bank
holding company. In acting on applications for such prior approval, the Federal
Reserve considers various factors, including, without limitation, the effect of
the proposed transaction on competition in relevant geographic and product
markets, and each transaction party’s financial condition, managerial resources
and the convenience and needs of the communities to be served, including the
performance record under the Community Reinvestment Act.
Bank
holding companies must also act as a source of financial and managerial strength
to subsidiary banks. This means that Bancorp is required to commit, as
necessary, resources to support the Bank. Under certain conditions, the Federal
Reserve may conclude that certain actions of a bank holding company, such as
payment of cash dividends, would constitute unsafe and unsound banking
practices.
Subsidiary banks of a bank holding company are subject to certain other
restrictions under the Federal Reserve Act and Regulation W covering
transactions with affiliates generally and in particular on extensions of credit
to the parent holding company or any affiliate, investments in the securities of
the parent, and covering the use of such securities as collateral for loans to
any borrower. These restrictions that apply may limit Bancorp’s ability to
obtain funds from the Bank for its cash needs, including funds for payment of
interest on its trust preferred securities, cash dividends and operational
expenses.
6
Bank Regulation
General.
The Bank is an Oregon
state-bank and is not a member of the Federal Reserve System. The Bank conducts
banking business in Oregon and Washington. The Bank is subject to supervision
and regulation by the Oregon Department of Consumer and Business Services, the
FDIC and to a lesser extent, the Washington Department of Financial
Institutions. The Bank’s regulators conduct regular examinations of the Bank and
have the authority to prohibit the Bank from engaging in unsafe or unsound
banking practices.
Deposit Insurance.
Deposits maintained
at the Bank are insured by the FDIC up to $250,000 per account owner through
December 31, 2009. On January 1, 2010, the standard coverage limits are
scheduled to return to $100,000 for all deposit categories except Individual
Retirement Accounts and certain other retirement accounts, which will continue
to be insured up to $250,000 per account owner. The Bank is required to pay
quarterly deposit insurance premiums to the FDIC. Premiums are based on how much
risk a particular institution presents to the Bank Insurance Fund. Banks with
higher levels of capital and a low degree of supervisory concern are assessed
lower premiums than banks with lower levels of capital or a higher degree of
supervisory concern. The FDIC may terminate deposit insurance if it determines
the institution involved has engaged in or is engaging in unsafe or unsound
banking practices, is in unsafe or unsound condition, or has violated applicable
laws, regulations or orders.
Transaction Account Guarantee Program
.
The Bank
participates in the FDIC’s Transaction Account Guarantee Program, which is one
of the two primary components of the FDIC’s Temporary Liquidity Guarantee
Program (the “TLGP”). Under the TLGP, effective October 14, 2008, through
December 31, 2009, all noninterest-bearing transaction accounts, IOLTA accounts,
and certain NOW accounts are fully guaranteed by the FDIC for the entire amount
in the account. Coverage under the Transaction Account Guarantee Program is in
addition to and separate from the coverage available under the FDIC’s general
deposit insurance rules.
Community Reinvestment Act and Fair Lending and Reporting Requirements.
The Bank is subject to the Community
Reinvestment Act of 1977, as amended (“CRA”) and to certain fair lending and
reporting requirements that relate primarily to home mortgage lending
operations. The CRA generally requires the federal banking agencies to evaluate
the record of a financial institution in meeting the credit needs of its local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of the institution. The federal banking agencies
may take into account compliance with the CRA when regulating and supervising
other activities, such as evaluating mergers, acquisitions and applications to
open a branch or facility. In connection with its assessment of CRA performance,
the FDIC assigns a rating of “outstanding,” “satisfactory,” “needs to improve”
or “substantial noncompliance.” The Bank received a CRA rating of satisfactory
during its most recent CRA examination in February 2008.
There are
several rules and regulations governing fair lending and reporting practices by
financial institutions. A bank may be subject to substantial damages, penalties
and corrective measures for any violation of fair lending and reporting,
including credit reporting, laws and regulations.
Consumer Privacy.
Bancorp and the Bank
are subject to laws and regulations that impose privacy standards that limit the
ability of banks and other financial institutions to disclose non-public
information about consumers to nonaffiliated third parties. These limitations
require disclosure of privacy policies to consumers and, in some circumstances,
allow consumers to prevent disclosure of certain personal information to a
nonaffiliated third party.
Capital Adequacy
Federal
bank regulatory agencies use capital adequacy guidelines in the examination and
regulation of bank holding companies and banks. If capital falls below minimum
levels, the bank holding company or bank may be denied approval to acquire or
establish additional banks or non-bank businesses or to open new facilities.
The FDIC
and Federal Reserve use risk-based capital guidelines for banks and bank holding
companies. Risk-based guidelines are designed to make capital requirements more
sensitive to differences in risk profiles among banks and bank holding
companies, to account for off balance sheet exposure and to minimize
disincentives for holding liquid low-risk assets. Assets and off balance sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off balance sheet items. The guidelines are minimums
and the Federal Reserve may require that a banking organization maintain ratios
in excess of the minimums, particularly organizations contemplating significant
expansion. Current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier I capital. Tier I capital for
bank holding companies includes common stockholders’ equity, qualifying
preferred stock and minority interests in equity accounts of consolidated
subsidiaries, minus certain deductions, including, without limitation, goodwill,
other identifiable intangible assets, and deferred tax assets.
7
The
Federal Reserve also employs a leverage ratio, which is Tier I capital as a
percentage of total assets minus certain deductions, including, without
limitations, goodwill, mortgage servicing assets, other identifiable intangible
assets, and certain deferred tax assets, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The Federal Reserve requires a minimum leverage ratio of
3%. However, for all but the most highly rated bank holding companies and for
bank holding companies seeking to expand, the Federal Reserve expects an
additional cushion of at least 1% to 2%.
The
Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), among other
things, created a statutory framework of supervisory actions indexed to the
capital level of the individual institution. Under regulations adopted by the
FDIC, an institution is assigned to one of five capital categories - well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized - depending on its total
risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio,
together with certain subjective factors. Institutions which are deemed to be
“undercapitalized” depending on the category to which they are assigned are
subject to certain mandatory supervisory corrective actions. Under current
regulations, a “well-capitalized” institution must have a Tier 1 risk-based
capital ratio of at least 6%, a total risk-based capital ratio of at least 10%,
and a leverage ratio of at least 5% and not be subject to a capital directive
order. Under these guidelines, Bancorp is considered well capitalized as of the
end of the fiscal year.
Under
FDICIA, each federal banking agency has prescribed, by regulation, non-capital
safety and soundness standards for institutions under its authority. These
standards cover internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution which fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions.
Management believes that the Bank currently satisfies all such
standards.
Dividends
The
principal source of Bancorp’s cash reserves is dividends received from the Bank.
The banking regulators may prohibit banks and bank holding companies from paying
dividends that would constitute an unsafe or unsound banking practice. In
addition, a bank may not pay cash dividends if doing so would reduce the amount
of its capital below that necessary to meet minimum applicable regulatory
capital requirements. Oregon law also limits a bank’s ability to pay
dividends.
Interstate Banking and Branching
The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
“Interstate Act”) generally authorizes interstate branching and relaxes federal
law restrictions on interstate banking. Currently, bank holding companies may
purchase banks in any state and states may not prohibit these purchases.
Additionally, banks are permitted to merge with banks in other states, as long
as the home state of neither merging bank has opted out under the legislation.
Oregon and Washington each enacted “opting in” legislation in accordance with
the Interstate Act. The Interstate Act requires regulators to consult with
community organizations before permitting an interstate institution to close a
branch in a low-income area.
The USA Patriot Act
Enacted
in 2001, the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”)
gives the federal government new powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing and broadened anti-money laundering requirements. The USA
Patriot Act and the Bank Secrecy Act require banks to implement policies and
procedures with respect to money laundering, suspicious activities, currency
transaction reporting and currency crimes.
Monetary and Fiscal Policy Effects
on Interest Rates
Banking
is a business which depends on interest rate differentials. In general, the
major portion of a bank’s earnings derives from the differences between: (i)
interest received by a bank on loans extended to its customers and the yield on
securities held in its investment portfolio; and (ii) the interest paid by a
bank on its deposits and its other borrowings (the bank’s “cost of funds.”)
Thus, our earnings and growth are constantly subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary, fiscal and related policies of the United States and its agencies,
particularly the Federal Reserve and the U.S. Treasury. The nature and timing of
changes in such policies and their impact cannot be predicted.
8
ITEM 1A.
RISK
FACTORS
The following are risks that management
believes are specific to our business. This should not be viewed as an all
inclusive list or in any particular order.
Future loan losses may exceed our
allowance for loan losses.
We are subject to credit risk, which
is the risk that borrowers will fail to repay loans in accordance with their
terms. An extended recession or further weakening of the economy or a specific
industry sector or a rapid change in interest rates could adversely affect our
borrowers’ ability to repay loans. A sustained weakness in the relevant real
estate markets could further adversely affect the value of the collateral for
many of our loans. Developments of this nature could result in losses in excess
of our allowance for credit losses. In addition, to the extent that loan
payments from borrowers are not timely, the loans will be placed on nonaccrual
status, thereby lowering earning assets balances, reducing future interest
income, and, in certain circumstances requiring reversal of previously accrued
interest income.
We maintain an allowance for loan
losses that represents management’s best estimate, as of a particular date, of
the probable amount of loan receivables that the Bank will be unable to collect.
When available information confirms that specific loans or portions of loans are
uncollectible, those amounts are charged off against the allowance for loan
losses. Our management establishes the allowance for loan losses based on a
continual evaluation of lending concentrations, specific credit risks, past loan
loss experience, loan portfolio and collateral quality, and relevant economic,
political, and regulatory conditions. Adverse changes in any of these or other
factors that management considers relevant may result in an increase in the
allowance for loan losses. In addition, federal and state banking regulators
periodically review the allowance for loan losses and may require that the Bank
increase the allowance or recognize loan charge-offs. Any additional provision
for loan losses to increase the allowance for loan losses results in a decrease
in net income, and possibly risk-based capital, and may have a material adverse
effect on our financial condition and results of operations. For more
information on this topic, see “Critical Accounting Policies” and “Allowance for
Credit Losses and Net Loan Charge-offs” in Item 7 of this report below.
Bancorp may need to raise additional
capital in the future to enhance or maintain desired levels of capital, improve
capital ratios, or increase liquidity available for operations.
In the
event Bancorp desires to raise additional capital, any equity or debt financing,
if available at all, may not be available on terms that are favorable to the
Company. In the case of equity financings, dilution to Bancorp’s shareholders
could result and securities issued in such financings may have rights,
preferences and privileges that are senior to those of Bancorp’s current
shareholders. Under Bancorp’s articles of incorporation, it may issue preferred
equity without first obtaining shareholder approval. Debt financing may include
covenants that restrict Bancorp’s operations and interest charges would detract
from future earnings. In the event additional capital is unavailable on
acceptable terms through available financing sources, we may instead take
additional steps to preserve capital, including further slowing of lending
activities and new loan commitments, selling certain assets, increasing loan
participations or eliminating our cash dividend to shareholders. During the
third quarter of 2008, we reduced our cash dividend to $.01 per share as part of
our efforts to preserve capital.
Home values may continue to decrease
leading to additional and greater than anticipated loan charge-offs and
valuation write downs on our other real estate owned (“OREO”) properties.
We foreclose on and take title to
the real estate serving as collateral for many of our loans as part of our
business. Real estate owned by the Bank and not used in the ordinary course of
its operations is referred to as “other real estate owned” or “OREO” property.
During 2008, we acquired a significant amount of OREO relating to loans
originated in the two-step loan portfolio (“two-step loans”) and, to a lesser
extent, other loan portfolios. Increased OREO balances lead to greater expenses
as we incur costs to manage and dispose of the properties and, in certain cases,
complete construction of structures prior to sale. We expect that our earnings
in 2009 will be negatively affected by various expenses associated with OREO,
including personnel costs, insurance and taxes, completion and repair costs, and
other costs associated with property ownership, as well as by the funding costs
associated with assets that are tied up in OREO. Any decrease in market prices
may lead to OREO write downs, with a corresponding expense in our income
statement. We evaluate OREO property values periodically and write down the
carrying value of the properties if the results of our evaluations require it.
Further property write downs could have a material adverse effect on our
financial condition and results of operations. We currently have $127.6 million
in nonaccrual loans and $70.1 million of OREO properties.
9
Rapidly changing interest rate
environments could reduce our net interest margin, net interest income, fee
income and net income.
Interest and fees on
loans and investment securities, net of interest paid on deposits and
borrowings, are a large part of our net income. Interest rates are key drivers
of our net interest margin and are subject to many factors beyond the control of
management. As interest rates change, net interest income is affected. Rapid
increases in interest rates in the future could result in interest expense
increasing faster than interest income because of mismatches in financial
instrument maturities. Rapid decreases in interest rates could result in
interest income decreasing faster than interest expense, for example, if
management is unable to match decreases in earning assets yields, with reduced
rates paid on deposits or borrowings. Periods of low market interest rates, such
as we have today, has adversely impacted our net interest spread and net
interest income because our earning assets yield decreases during a time that
our cost of interest bearing liabilities is already low and cannot be
correspondingly reduced further.
For more information on this topic, see “Quantitative and
Qualitative Disclosures about Market Risk” in Item 7A of this report below.
We face liquidity risks in the
operation of our business.
Liquidity
is crucial to the operation of Bancorp and the Bank. Liquidity risk is the
potential that we will be unable to fund increases in assets or meet payment
obligations, including obligations to depositors, as they become due because of
an inability to obtain adequate funding or liquidate assets. For example,
funding illiquidity may arise if we are unable to attract core deposits or are
unable to renew at acceptable pricing long-term borrowings or short-term
borrowings from the overnight inter-bank market, the Federal Home Loan Bank
System, brokered deposits, or the Federal Reserve discount window. Illiquidity
may also arise if our regulatory capital levels decrease, our lenders require
additional collateral to secure our repayment obligations, or a large amount of
our deposits are withdrawn. We may also experience illiquidity due to unexpected
cash outflows on committed lines of credit or financial guarantees or due to
unexpected events. The increasingly competitive retail deposit environment
increases liquidity risk (and increases our cost of funds) as increasingly
sophisticated depositors move funds more frequently in search of higher rates or
better opportunities. Bancorp’s liquidity may be negatively impacted by
regulatory or statutory restrictions on payment of cash dividends by the Bank.
We monitor our liquidity risk, including, without limitation, through
contingency planning stress testing. We also seek to avoid over concentration of
funding sources and to establish and maintain back-up funding facilities that we
can draw down if normal funding sources become unavailable. If we fail to
control our liquidity risks, there may be materially adverse effects on our
results of operations and financial condition.
Disruptions in the real estate
mortgage market may continue to impact our operations.
In late
2007, lenders and other participants in the real estate mortgage market began to
experience higher than anticipated levels of borrower defaults and lender
foreclosures, which in turn caused significant adverse economic consequences to
many participants in the real estate lending market, including loan originators,
loan servicers, and participants in the secondary loan markets. These
consequences spread to other markets, including, most significantly, the general
credit markets and real estate markets, and the economy as a whole. We have
experienced a high rate of default in connection with our two-step loan
portfolio and increasing rates of default in other areas that are due, in part,
to the disruptions in the lending and real estate markets and the weak economy
in general. We expect to experience further defaults and the rate of defaults
may worsen if the credit and real estate markets do not stabilize and eventually
begin to improve or if economic conditions do not improve.
The Congressional and regulatory
response to the current economic and credit crisis could have an adverse effect
on our business.
Federal
and state legislators and regulators are expected to pursue increased regulation
of how banks are operated and how loans are originated, purchased, and sold as a
result of the current economic and credit crisis. Changes in the lending market
and secondary markets for loans and related congressional and regulatory
responses may impact how the Bank makes and underwrites loans, buys and sells
such loans in secondary markets, and otherwise conducts its business. We are
unable to predict whether any legislative or regulatory initiatives or actions
will be implemented, what form they will take, whether they will be directed at
the Bank, or whether such initiatives or actions, once they are initiated or
taken, will thereafter continue to change. Any such actions could affect us in
substantial and unpredictable ways and could have an adverse effect on our
business, financial condition and results of operations. For more information
regarding the regulatory environment in which we operate, see “Supervision and
Regulation” in Item 1 of this report above. The administration of President
Barack Obama recently announced a comprehensive mortgage-relief plan. The
effects of this plan and any other similar programs or inititatives that may be
implemented are difficult to predict, but they could result in increased losses
to the Bank, either directly or indirectly through the Bank's ownership of
investment securities, including mortgage-backed securities.
10
Our business may be harmed by
adverse events at other financial institutions.
Financial
institutions are interrelated as a result of trading, clearing, correspondent
banking, counterparty, and other relationships and because of regulatory
factors. Bancorp enters into transactions with financial services companies,
including commercial banks and correspondent banks. Many of these transactions
expose Bancorp and the Bank to credit and bankruptcy risk in the event of a
default or bankruptcy by a counter party. The Bank may also be negatively
impacted by the failure of other banks. For example, as a depository of public
funds, the Bank will be assessed, and the Bank is statutorily obligated to pay,
a pro rata share of the losses of public funds held at a failed public
depository in Oregon and Washington. In addition, assessments the Bank pays to
the FDIC and others, including deposit insurance premiums, will increase even
further in the event of bank failures or other adverse events affecting the
banking system generally or the Bank in particular.
Significant legal and regulatory
actions could subject us to uninsured liabilities, associated reputational risk,
and reduced revenues.
From time
to time, we are sued for damages or threatened with lawsuits relating to various
aspects of our operations. We may also be subject to investigations and possibly
substantial civil money penalties assessed by, or other actions of, federal or
state regulators in connection with violations or alleged violations of
applicable laws, regulations or standards. We may incur substantial attorney
fees and expenses in the process of defending against lawsuits or regulatory
actions and our insurance policies may not cover, or cover adequately, the costs
of adverse judgments, civil money penalties, and attorney fees and expenses. As
a result, we may be exposed to substantial uninsured liabilities, which could
adversely affect our results of operations, capital, and financial condition.
We are
subject to reputational risk, which is the potential that negative publicity
regarding our business practices, whether true or not, could cause a decline in
our customer base, stock price, or general reputation in the markets in which we
operate. Reputational risk is heightened in the instance of publicity
surrounding lawsuits or regulatory actions.
We may be subject to environmental
liability risk associated with lending activities.
A
significant portion of our loan portfolio is secured by real property. In the
ordinary course of business, we may foreclose on and take title to properties
securing loans. There is a risk that hazardous or toxic substances will be found
on these properties, in which case we may be liable for remediation costs and
related personal injury and property damage. Compliance with environmental laws
may require us to incur substantial expenses and may materially reduce the
affected property’s value or limit our ability to use or sell the affected
property. Environmental indemnifications obtained from borrowers and their
principals or affiliates may not adequately compensate the Bank for losses
related to environmental conditions.
Slower than anticipated growth
and/or revenues from new branches and product and service offerings could result
in reduced net income.
We have placed a
strategic emphasis on expanding our branch network and product offerings.
Executing this strategy carries risks that costs will increase without
compensating increases in revenues. If we experience lower than expected loan
and deposit growth at new branches and lower than expected demand for new
product offerings, we may not realize anticipated increases in revenues and net
income. Opening new branches and introducing new products may result in more
expenses than anticipated and divert financial and personnel resources from
current core operations
.
Decreased volumes and lower gains on
sales of mortgage and SBA loans, and loan repurchase obligations, could
adversely affect our net income.
We originate and sell
mortgage loans and the guaranteed portion of SBA loans. Changes in interest
rates affect demand for our loan products and the revenue realized on the sale
of the loans. A decrease in the volume of loans sold may reduce associated
revenues and net income. In the event of certain breaches of warranties and
representations made by us in connection with loan sales, we may be
contractually obligated to repurchase loans sold to correspondent lenders in the
secondary market. Any repurchases would alter our financial assumptions which
were based on recognizing the revenue associated with the original sale of the
loans, and could adversely affect the results of our lending
operations.
A weakening economy could negatively
impact payment systems, trust and investment revenues.
Reduced
transaction volume and lower average transaction amounts associated with reduced
economic activity and the recessionary environment may result in declining fees
from credit and debit cards, merchant relationships, and other business lines.
Additionally, a weak economy may adversely affect the equity markets, which in
turn, would reduce our trust and investment sales revenues.
Inability to hire or retain key
professionals, management and staff could adversely affect our revenues and net
income.
We rely on key personnel to manage
and operate our business, including, but not limited to, major revenue
generating functions such as our loan and deposit portfolios. The loss of key
staff may adversely affect our ability to maintain and manage these portfolios
effectively, which could negatively affect our revenues and earnings. In
addition, loss of key personnel could result in increased recruiting and hiring
expenses, which could cause a decrease in our net income.
11
We face operational risks that may
result in unexpected losses.
We face various
operational risks that arise from the potential that inadequate information
systems, operational problems, failures in internal controls, breaches of our
security systems, fraud, the execution of unauthorized transactions by
employees, or any number of unforeseen catastrophes could result in unexpected
losses. Additionally, third party vendors provide key components of our business
infrastructure such as internet connections, network access, data reporting, and
data processing. Any problems caused by third parties could adversely affect our
ability to deliver products and services to our customers and our revenues,
expenses, and earnings. Replacing third party vendors, should that be necessary,
may entail significant delay and expense.
The financial services industry is
very competitive.
We face
competition in attracting and retaining deposits, making loans and providing
other financial services. Our competitors include other community banks, larger
banking institutions, including institutions that have only recently become bank
holding companies in connection with their acceptance of TARP investments, and a
wide range of other financial institutions, such as credit unions,
government-sponsored enterprises, mutual fund companies, insurance companies and
other non-bank businesses. Many of these competitors have substantially greater
resources than us. For a more complete discussion of our competitive
environment, see “Competition” in Item 1 of this report above. If we are unable
to compete effectively, we will lose market share, and income from loans and
other products may be reduced. We are currently in a particularly competitive
market for low cost deposits, which has led to increased pressure on our deposit
balances and net interest margin. This competition for deposits is likely to
increase given the large new entrants in the deposit market, such as GMAC,
American Express and Morgan Stanley, and traditional banks’ desire to maintain
and increase deposits. These new entrants in the deposit market have much
greater resources than we do and a history of competing aggressively in consumer
and business markets.
The Company’s market value could
result in an impairment of goodwill.
Goodwill is evaluated for impairment
on an annual basis at April 30, or when circumstances indicate an impairment may
exist. Recently, the Company’s common stock has been trading at a price
significantly below its book value. The Company evaluated its goodwill as of
December 31, 2008, due to a decrease in the Company’s market capitalization, and
concluded that there was no impairment.
If
impairment of goodwill was deemed to exist, we would be required to write down
our goodwill resulting in a charge to earnings. For more information regarding
Bancorp’s goodwill, see Note 1 “Summary of Significant Accounting Policies” to
the Company’s audited financial statements included under “Financial Statements
and Supplementary Data” in Item 8 of this report.
Market and other constraints on our
construction loan origination volumes are expected to lead to decreases in our
interest and fee income that are not expected to be offset by reductions in our
noninterest expenses.
Due to
existing conditions in housing markets in the areas in which we operate and
other factors, we project that our construction loan originations will be
materially constrained throughout 2009. This will reduce interest income and
fees generated from this part of our business. Unless this revenue decline is
offset by other areas of our operations, our total revenues may decline relative
to our total noninterest expenses. We expect that it will be difficult to find
new revenue sources in the near term to offset expected declines in our interest
income. We have implemented plans to trim our noninterest expenses in light of
the unfavorable environment, but we do not expect these expense reductions to
completely offset revenue declines, at least in the near term.
The value of certain securities in
our investment securities portfolio may be negatively affected by disruptions in
the market for these securities.
In
addition to interest rate risk typically associated with an investment
portfolio, the market for certain investment securities held within our
investment portfolio has over the past year become much less liquid. This
coupled with uncertainly surrounding the credit risk associated with the
underlying collateral has caused material discrepancies in valuation estimates
obtained from third parties. We value some of our investments using internally
developed cash flow and valuation models, which include certain subjective
estimates which we believe, are reflective of the estimates a purchaser of such
securities would use if such a transaction were to occur. The volatile market
may affect the value of these securities, such as through reduced valuations due
to the perception of heightened credit and liquidity risks, in addition to
interest rate risk typically associated with these securities. There can be no
assurance that the declines in market value associated with these disruptions
will not result in impairments of these assets, which would lead to accounting
charges that could have a material adverse effect on our net income, equity, and
capital ratios.
12
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The
principal properties owned by the Bank include a 40,000-square-foot office and
branch facility in downtown Salem, Oregon, a 15,600-square-foot office and
branch facility in Newport, Oregon, and a 12,000-square-foot branch and office
facility in Lacey, Washington. In total, the Bank owns 27 buildings, primarily
to house branch offices. The Bank leases the land under seven buildings and owns
the land under 20 of these buildings. In addition, the Bank leases 45 office
spaces and buildings for branch locations.
Other
non-branch office facilities are located in leased office space, including our
headquarters office in Lake Oswego, Oregon, office and processing space in
Salem, Oregon, where the Bank’s data center is located, space in Wilsonville,
Oregon, where its loan servicing and operations center is located, space in
Vancouver, Washington, where we have lending personnel and a branch office, and
space in downtown Portland, where we have commercial banking personnel, West
Coast Investment Services and West Coast Trust. In addition, we lease three
smaller office spaces for lending personnel in Lake Oswego and Bend, Oregon, and
in Tukwila, Washington.
The aggregate monthly rental on 52
leased properties is approximately $349,000.
ITEM 3.
LEGAL
PROCEEDINGS
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.
ITEM 4.
SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
None
.
13
PART II
|
ITEM
5.
|
MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER
MATTERS
AND
ISSUER PURCHASES OF
EQUITY SECURITIES
|
Stock Price and Dividends
Bancorp common
stock trades on the NASDAQ Global Select Market under the symbol “WCBO.” The
high and low closing sale prices per share of our common stock for each quarter
during the last two years are shown in the table below, together with dividend
information for each period. The prices below do not include retail mark-ups,
mark-downs or commissions, may not represent actual transactions and are not
adjusted for dividends. As of December 31, 2008, we had approximately 1,916
holders of record.
|
|
|
2008
|
|
2007
|
|
|
|
|
Market Price
|
|
Cash
dividend
|
|
Market Price
|
|
Cash
dividend
|
|
|
|
|
High
|
|
Low
|
|
declared
|
|
High
|
|
Low
|
|
declared
|
|
|
|
1st Quarter
|
$18.01
|
|
$11.06
|
|
$0.1350
|
|
$34.44
|
|
$29.31
|
|
$0.1200
|
|
|
|
2nd
Quarter
|
$15.00
|
|
$8.67
|
|
$0.1350
|
|
$32.49
|
|
$29.57
|
|
$0.1200
|
|
|
|
3rd Quarter
|
$18.12
|
|
$7.40
|
|
$0.0100
|
|
$31.85
|
|
$25.97
|
|
$0.1350
|
|
|
|
4th
Quarter
|
$14.76
|
|
$3.69
|
|
$0.0100
|
|
$30.78
|
|
$18.50
|
|
$0.1350
|
|
Bancorp
dividends are limited under federal and Oregon laws and regulations pertaining
to Bancorp’s financial condition. Payment of dividends by the Bank is also
subject to limitation under state and federal banking laws and by actions of
state and federal banking regulators. For more information on this topic, see
“Supervision and Regulation” in Item 1 of this report above, and “Liquidity and
Sources of Funds” in Item 7 of this report below.
Information regarding securities authorized for issuance under equity
compensation plans is incorporated by reference into Part III, Item 12 of this
report.
Issuer Purchases of Equity
Securities
The following table provides information about purchases of common stock
by the Company during the quarter ended December 31, 2008:
|
|
|
|
|
|
|
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/Cancelled
(1)
|
|
per Share
|
|
(2)
|
|
Under the Plans or Programs
|
|
|
10/1/08 - 10/31/08
|
367
|
|
$9.26
|
|
-
|
|
1,051,821
|
|
|
11/1/08 -
11/30/08
|
-
|
|
|
|
-
|
|
1,051,821
|
|
|
12/1/08 - 12/31/08
|
11
|
|
$4.20
|
|
-
|
|
1,051,821
|
|
|
Total for quarter
|
378
|
|
|
|
-
|
|
|
|
(1)
|
Shares repurchased by Bancorp
during the quarter include shares repurchased from employees in connection
with stock option swap exercises and cancellation of restricted stock to
pay withholding taxes totaling 367 shares, 0 shares, and 11 shares,
respectively, for the periods indicated. There were no shares repurchased
in the periods indicated pursuant to the Company’s corporate stock
repurchase program publicly announced in July 2000 (the “Repurchase
Program”) and described in footnote 2 below.
|
|
(2)
|
Under the Repurchase Program, the
board of directors originally authorized the Company to purchase up to
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, and 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 December 31, 2008, of approximately 4.9 million
shares.
|
14
Five Year Stock Performance Graph
The following
chart compares the yearly percentage change in the cumulative shareholder return
on our common stock during the five years ended December 31, 2008, with (1) the
Total Return Index for the NASDAQ Stock Market (U.S. Companies) and (2) the
Total Return Index for NASDAQ Bank Stocks. This comparison assumes $100.00 was
invested on December 31, 2003, in our common stock and the comparison groups and
assumes the reinvestment of all cash dividends prior to any tax effect and
retention of all stock dividends. West Coast Bancorp’s total cumulative return
was -64.8% over the five year period ended December 31, 2008, compared to -18.1%
and -20.0% for the NASDAQ Bank Stocks and NASDAQ composite, respectively.
|
|
Period Ended
|
|
Index
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
|
West Coast
Bancorp
|
100.0
|
121.2
|
127.9
|
169.7
|
93.0
|
35.2
|
|
NASDAQ
Composite
|
100.0
|
109.1
|
111.4
|
122.9
|
136.0
|
81.9
|
|
NASDAQ Bank
Index
|
100.0
|
113.4
|
111.2
|
126.4
|
101.6
|
80.0
|
15
ITEM 6.
SELECTED FINANCIAL
DATA
Consolidated Five Year Financial
Data
The following
selected consolidated five year financial data should be read in conjunction
with Bancorp’s audited consolidated financial statements and the related notes
to those statements presented in Item 8 of this report.
|
(Dollars in
thousands, except per share data)
|
As of and For the Year ended December
31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Interest income
|
$
|
140,846
|
|
|
$
|
183,190
|
|
|
$
|
150,798
|
|
|
$
|
112,991
|
|
|
$
|
92,988
|
|
|
Interest
expense
|
|
48,696
|
|
|
|
68,470
|
|
|
|
49,926
|
|
|
|
26,430
|
|
|
|
18,115
|
|
|
Net interest income
|
|
92,150
|
|
|
|
114,720
|
|
|
|
100,872
|
|
|
|
86,561
|
|
|
|
74,873
|
|
|
Provision for
credit losses
|
|
40,367
|
|
|
|
38,956
|
|
|
|
2,733
|
|
|
|
2,175
|
|
|
|
2,260
|
|
|
Net interest income after provision for credit losses
|
|
51,783
|
|
|
|
75,764
|
|
|
|
98,139
|
|
|
|
84,386
|
|
|
|
72,613
|
|
|
Noninterest
income
|
|
24,629
|
|
|
|
33,498
|
|
|
|
28,096
|
|
|
|
23,099
|
|
|
|
22,463
|
|
|
Noninterest expense
|
|
90,323
|
|
|
|
85,299
|
|
|
|
81,665
|
|
|
|
72,634
|
|
|
|
63,371
|
|
|
Income (loss)
before income taxes
|
|
(13,911
|
)
|
|
|
23,963
|
|
|
|
44,570
|
|
|
|
34,851
|
|
|
|
31,705
|
|
|
Provision (benefit) for income taxes
|
|
(7,598
|
)
|
|
|
7,121
|
|
|
|
15,310
|
|
|
|
11,011
|
|
|
|
9,697
|
|
|
Net income
(loss)
|
$
|
(6,313
|
)
|
|
$
|
16,842
|
|
|
$
|
29,260
|
|
|
$
|
23,840
|
|
|
$
|
22,008
|
|
|
|
|
Net interest income on a tax equivalent basis
|
$
|
93,901
|
|
|
$
|
116,361
|
|
|
$
|
102,432
|
|
|
$
|
88,025
|
|
|
$
|
76,526
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
(0.41
|
)
|
|
$
|
1.09
|
|
|
$
|
1.95
|
|
|
$
|
1.63
|
|
|
$
|
1.48
|
|
|
Diluted earnings
(loss) per share
|
$
|
(0.41
|
)
|
|
$
|
1.05
|
|
|
$
|
1.86
|
|
|
$
|
1.55
|
|
|
$
|
1.42
|
|
|
Cash dividends
|
$
|
0.29
|
|
|
$
|
0.51
|
|
|
$
|
0.45
|
|
|
$
|
0.40
|
|
|
$
|
0.36
|
|
|
Period end book
value
|
$
|
12.63
|
|
|
$
|
13.35
|
|
|
$
|
12.89
|
|
|
$
|
10.69
|
|
|
$
|
9.94
|
|
|
Weighted average common shares
outstanding
|
|
15,472
|
|
|
|
15,507
|
|
|
|
15,038
|
|
|
|
14,658
|
|
|
|
14,849
|
|
|
Weighted average
diluted shares outstanding
|
|
15,472
|
|
|
|
16,045
|
|
|
|
15,730
|
|
|
|
15,344
|
|
|
|
15,526
|
|
|
|
|
Total assets
|
$
|
2,516,140
|
|
|
$
|
2,646,614
|
|
|
$
|
2,465,372
|
|
|
$
|
1,997,138
|
|
|
$
|
1,790,919
|
|
|
Total
deposits
|
$
|
2,024,379
|
|
|
$
|
2,094,832
|
|
|
$
|
2,006,352
|
|
|
$
|
1,649,462
|
|
|
$
|
1,472,709
|
|
|
Total long-term borrowings
|
$
|
91,059
|
|
|
$
|
83,100
|
|
|
$
|
57,991
|
|
|
$
|
83,100
|
|
|
$
|
85,500
|
|
|
Total loans,
net
|
$
|
2,035,876
|
|
|
$
|
2,125,752
|
|
|
$
|
1,924,673
|
|
|
$
|
1,533,985
|
|
|
$
|
1,409,023
|
|
|
Stockholders’ equity
|
$
|
198,187
|
|
|
$
|
208,241
|
|
|
$
|
200,882
|
|
|
$
|
157,123
|
|
|
$
|
147,854
|
|
|
Financial
ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
assets
|
|
-0.25
|
%
|
|
|
0.66
|
%
|
|
|
1.33
|
%
|
|
|
1.28
|
%
|
|
|
1.28
|
%
|
|
Return on average equity
|
|
-3.06
|
%
|
|
|
7.93
|
%
|
|
|
16.47
|
%
|
|
|
15.76
|
%
|
|
|
15.45
|
%
|
|
Average equity to
average assets
|
|
8.04
|
%
|
|
|
8.37
|
%
|
|
|
8.10
|
%
|
|
|
8.09
|
%
|
|
|
8.29
|
%
|
|
Dividend payout ratio
|
|
-70.73
|
%
|
|
|
47.51
|
%
|
|
|
24.19
|
%
|
|
|
24.50
|
%
|
|
|
25.00
|
%
|
|
Efficiency ratio
(1)
|
|
72.79
|
%
|
|
|
56.90
|
%
|
|
|
62.23
|
%
|
|
|
64.19
|
%
|
|
|
64.01
|
%
|
|
Net loans to assets
|
|
80.91
|
%
|
|
|
80.33
|
%
|
|
|
78.07
|
%
|
|
|
76.81
|
%
|
|
|
78.68
|
%
|
|
Average yields earned
(2)
|
|
5.92
|
%
|
|
|
7.72
|
%
|
|
|
7.37
|
%
|
|
|
6.49
|
%
|
|
|
5.84
|
%
|
|
Average rates paid
|
|
2.60
|
%
|
|
|
3.76
|
%
|
|
|
3.27
|
%
|
|
|
2.06
|
%
|
|
|
1.50
|
%
|
|
Net interest spread
(2)
|
|
3.32
|
%
|
|
|
3.96
|
%
|
|
|
4.10
|
%
|
|
|
4.43
|
%
|
|
|
4.34
|
%
|
|
Net interest margin
(2)
|
|
3.90
|
%
|
|
|
4.86
|
%
|
|
|
4.96
|
%
|
|
|
4.99
|
%
|
|
|
4.72
|
%
|
|
Nonperforming assets
to total assets
|
|
7.86
|
%
|
|
|
1.12
|
%
|
|
|
0.06
|
%
|
|
|
0.05
|
%
|
|
|
0.12
|
%
|
|
Allowance for loan losses to total
loans
|
|
1.40
|
%
|
|
|
2.16
|
%
|
|
|
1.18
|
%
|
|
|
1.32
|
%
|
|
|
1.33
|
%
|
|
Allowance for credit
losses to total loans
|
|
1.45
|
%
|
|
|
2.53
|
%
|
|
|
1.18
|
%
|
|
|
1.32
|
%
|
|
|
1.33
|
%
|
|
Net loan charge-offs to average
loans
|
|
3.04
|
%
|
|
|
0.34
|
%
|
|
|
0.06
|
%
|
|
|
0.05
|
%
|
|
|
0.11
|
%
|
|
Allowance for loan
loss to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonperforming loans
|
|
22.67
|
%
|
|
|
177.53
|
%
|
|
|
1567.61
|
%
|
|
|
1881.86
|
%
|
|
|
867.48
|
%
|
|
(1)
|
The efficiency ratio has been
computed as noninterest expense divided by the sum of net interest income
on a tax equivalent basis and noninterest income excluding gains/losses on
sales of securities.
|
|
(2)
|
Interest earned on nontaxable
securities has been computed on a 35% tax equivalent basis.
|
16
Consolidated Quarterly Financial
Data
The following
table presents selected consolidated quarterly financial data for each quarter
of 2008 and 2007. The financial information contained in this table reflects all
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods.
|
(Dollars in
thousands, except per share data)
|
2008 Quarters ended (unaudited)
|
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
Interest income
|
$
|
32,017
|
|
|
$
|
34,772
|
|
|
$
|
35,745
|
|
|
$
|
38,312
|
|
|
Interest
expense
|
|
10,880
|
|
|
|
11,049
|
|
|
|
12,032
|
|
|
|
14,735
|
|
|
Net interest income
|
|
21,137
|
|
|
|
23,723
|
|
|
|
23,713
|
|
|
|
23,577
|
|
|
Provision for
credit losses
|
|
16,517
|
|
|
|
9,125
|
|
|
|
6,000
|
|
|
|
8,725
|
|
|
Net interest income after provision for credit losses
|
|
4,620
|
|
|
|
14,598
|
|
|
|
17,713
|
|
|
|
14,852
|
|
|
Noninterest
income
|
|
4,310
|
|
|
|
1,070
|
|
|
|
9,038
|
|
|
|
10,211
|
|
|
Noninterest expense
|
|
22,535
|
|
|
|
22,221
|
|
|
|
23,346
|
|
|
|
22,221
|
|
|
Income (loss)
before income taxes
|
|
(13,605
|
)
|
|
|
(6,553
|
)
|
|
|
3,405
|
|
|
|
2,842
|
|
|
Provision (benefit) for income taxes
|
|
(4,924
|
)
|
|
|
(4,237
|
)
|
|
|
721
|
|
|
|
842
|
|
|
Net income
(loss)
|
$
|
(8,681
|
)
|
|
$
|
(2,316
|
)
|
|
$
|
2,684
|
|
|
$
|
2,000
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
(0.56
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|
|
Diluted earnings
(loss) per share
|
$
|
(0.56
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|
|
|
|
Return on average assets
(1)
|
|
-1.38
|
%
|
|
|
-0.36
|
%
|
|
|
0.41
|
%
|
|
|
0.31
|
%
|
|
Return on
average equity
(1)
|
|
-17.21
|
%
|
|
|
-4.47
|
%
|
|
|
5.19
|
%
|
|
|
3.81
|
%
|
(1)
Ratios have been
annualized.
|
(Dollars in
thousands, except per share data)
|
2007 Quarters ended (unaudited)
|
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
Interest income
|
$
|
45,528
|
|
|
$
|
47,742
|
|
|
$
|
46,148
|
|
|
$
|
43,772
|
|
|
Interest
expense
|
|
17,253
|
|
|
|
17,905
|
|
|
|
17,424
|
|
|
|
15,888
|
|
|
Net interest income
|
|
28,275
|
|
|
|
29,837
|
|
|
|
28,724
|
|
|
|
27,884
|
|
|
Provision for
credit losses
|
|
29,956
|
|
|
|
2,700
|
|
|
|
3,500
|
|
|
|
2,800
|
|
|
Net interest income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after provision for credit losses
|
|
(1,681
|
)
|
|
|
27,137
|
|
|
|
25,224
|
|
|
|
25,084
|
|
|
Noninterest
income
|
|
8,615
|
|
|
|
8,145
|
|
|
|
8,705
|
|
|
|
8,033
|
|
|
Noninterest expense
|
|
20,160
|
|
|
|
22,602
|
|
|
|
21,500
|
|
|
|
21,037
|
|
|
Income (loss)
before income taxes
|
|
(13,226
|
)
|
|
|
12,680
|
|
|
|
12,429
|
|
|
|
12,080
|
|
|
Provision (benefit) for income taxes
|
|
(5,739
|
)
|
|
|
4,350
|
|
|
|
4,294
|
|
|
|
4,216
|
|
|
Net income
(loss)
|
$
|
(7,487
|
)
|
|
$
|
8,330
|
|
|
$
|
8,135
|
|
|
$
|
7,864
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
(0.48
|
)
|
|
$
|
0.54
|
|
|
$
|
0.52
|
|
|
$
|
0.51
|
|
|
Diluted earnings
(loss) per share
|
$
|
(0.48
|
)
|
|
$
|
0.52
|
|
|
$
|
0.50
|
|
|
$
|
0.49
|
|
|
|
|
Return on average assets
(1)
|
|
-1.14
|
%
|
|
|
1.29
|
%
|
|
|
1.29
|
%
|
|
|
1.31
|
%
|
|
Return on
average equity
(1)
|
|
-13.51
|
%
|
|
|
15.33
|
%
|
|
|
15.51
|
%
|
|
|
15.68
|
%
|
(1)
Ratios have been
annualized.
17
|
ITEM
7.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion should be read in conjunction with the audited consolidated
financial statements and related notes to those statements as of December 31,
2008 and 2007, and for each of the three years in the period ended December 31,
2008, of West Coast Bancorp and its subsidiaries that appear in Item 8
“Financial Statements and Supplementary Data” of this report. References to
“we,” “our” or “us” refer to West Coast Bancorp and its
subsidiaries.
Forward Looking Statement Disclosure
Statements in this Annual Report of West Coast Bancorp (“Bancorp” or the
“Company”) regarding future events or performance are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995 (the “PSLRA”) and are made pursuant to the safe harbors of the PSLRA.
The Company’s actual results could be quite different from those expressed or
implied by the forward-looking statements. Any statements containing the words
“
could,”
“may,” “should,” “plan,” “believes,” “anticipates,” “estimates,” “predicts,”
“expects,” “projects,” “potential,” or “continue,” or words of similar import,
constitute “forward-looking statements,” as do any other statements that
expressly or implicitly predict future events, results, or performance. Factors
that could cause results to differ from results expressed or implied by our
forward-looking statements include, among others, risks discussed in the text of
this Annual Report as well as the following specific factors:
-
General economic conditions, whether national or regional, and
conditions in the real estate markets that could affect the demand for our
loan and other products and ability of borrowers to repay loans, lead to
further declines in credit quality and increased loan losses, and continue to
negatively affect the value and salability of the real estate that is the
collateral for many of our loans or that we own directly;
-
Changing business, banking, or
regulatory conditions or policies, or new legislation, affecting the financial
services industry, including the Emergency Economic Stabilization Act of 2008
and related programs such as the U.S. government’s Troubled Assets Relief
Program and any new legislation adopted by Congress and the administration of
President Barack Obama, that could lead to changes in the competitive balance
among financial institutions, restrictions on bank activities, changes in
costs, including deposit insurance premiums, for particular financial
institutions or financial institutions generally, increase regulatory
scrutiny, declines in consumer confidence in depository institutions generally
or certain financial institutions in particular 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 Bancorp achieves on loans and
increase rates Bancorp pays on deposits, loss of Bancorp’s 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, as well as changes in,
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 Bancorp’s investment securities;
-
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, attract
and retain key personnel; close loans in the pipeline; generate loan and deposit
balances at projected spreads; sustain fee generation and gains on sales of
loans; maintain asset quality and control risk; limit the amount of net loan
charge-offs; successfully dispose of properties or other assets obtained through
foreclosures, 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 and assumptions only as of the date of the
statements. Bancorp 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”).
18
Critical Accounting
Policies
We have
identified our most critical accounting policies to be those related to the
allowance for credit losses and valuation of other real estate owned (“OREO”).
Allowance for Credit Losses.
The
allowance for credit losses is comprised of two components: the allowance for
loan losses and the reserve for unfunded commitments. The allowance for loan
losses is a reserve that relates to outstanding loan balances, while the reserve
for unfunded commitments relates to that portion of total loan commitments that
have not yet funded as of the date the reserve is calculated.
Our
methodology for establishing the allowance for credit losses incorporates a
variety of risk considerations, both quantitative and qualitative, that
management believes are appropriate at each reporting date. Quantitative factors
include our historical loss experience, delinquency and charge-off trends,
estimates of, and changes in, collateral values, changes in risk ratings on
loans and other factors. Qualitative factors include the general economic
environment in our markets and, in particular, the state of the real estate
market and specific relevant industries. Other qualitative factors that are
considered in our methodology include, size and complexity of individual loans
in relation to the lending officer’s background and experience levels, loan
structure, extent and nature of waivers of existing loan policies, and pace of
loan portfolio growth. As we add new products, increase the complexity of the
loan portfolio, and expand our geographic coverage, we intend to enhance and
adapt our methodology to keep pace with the size and complexity of the loan
portfolio. Changes in any of the above factors could have a significant effect
on the calculation of the allowance for credit losses in any given period.
Management believes that our systematic methodology continues to be appropriate
given our size and level of complexity. This discussion should be read in
conjunction with our audited consolidated financial statements and related notes
included in Item 8 of this report, and the section “Allowance for Credit Losses
and Net Loan Charge-offs” below.
As of
September 30, 2007, we reclassified $1.0 million of the allowance for loan
losses to a reserve for unfunded loan commitments. As a result, we are reporting
our allowance for credit losses in this report and elsewhere for ease of
comparison to prior periods and to give readers information about our entire
loan portfolio, including our unfunded commitments. The reclassification of a
portion of our allowance to a separate reserve had no impact on our provision
for loan losses expense. The reserve for unfunded commitments is evaluated on a
quarterly basis and appropriate increases or decreases will be reflected in the
income statement. At December 31, 2008, our reserve for unfunded commitments was
$1.0 million.
Valuation of OREO.
OREO is real property
of which the Bank has taken substantial possession or that has been deeded to
the Bank through a deed-in-lieu of foreclosure, non-judicial foreclosure,
judicial foreclosure or similar process in partial or full satisfaction of a
loan or loans. OREO is initially recorded at the lower of the carrying amount of
the loan or fair value of the property less estimated costs to sell. This amount
becomes the property’s new basis. Management considers third party appraisals as
well as independent fair market value assessments from realtors or persons
involved in selling OREO in determining the fair value of particular properties.
Accordingly, the valuation of OREO is subject to significant external and
internal judgment. Any differences between management’s assessment of fair
value, less estimated cost to sell, and the carrying value of the loan at the
date a particular property is transferred into OREO are charged to the allowance
for credit losses. Thereafter, decreases in the value of OREO are considered
valuation adjustments and trigger a corresponding charge to line item “other
real estate owned sales and valuation adjustments” within total noninterest
income of the consolidated statements of income. Management has policies and
procedures in place to review OREO valuation periodically in an effort to ensure
the properties are carried at the lower of its new basis or fair value, net of
estimated costs to sell. Any subsequent OREO write downs are charged to other
real estate owned sales and valuation adjustments. At December 31, 2008, the Bank had $70.1 million of
OREO.
19
Developments, Business Strategies
and Financial Overview
Developments.
Subsequent to the
issuance of our earnings release we made an adjustment that is reflected in the
financial results for fourth quarter and the full year 2008. Including these
adjustments, our net loss for the full year 2008 was $6.3 million or $.41 per
share, as compared to a net loss of $5.8 million or $.38 per share disclosed in
our earnings release dated January 19, 2009. Full year return on equity
decreased to -3.1% from the previously reported -2.8%. The adjustment related to
$.5 million after tax in equity compensation expense, due to a recalculation
associated with employees eligible for retirement under certain equity
compensation plans. The adjustment only affected the timing of expense
recognition as future recorded equity compensation expense will decline by a
like amount.
Business Strategies.
To sustain future growth and accomplish
our financial objectives, we have defined five strategies:
-
Focus on profitable customer segments;
-
Exploit local market
opportunities;
-
Design and support value added
products;
-
Expand branch distribution; and
-
Maintain community focus and high
employee and customer satisfaction.
Our
strategies are designed to direct our tactical investment decisions to
accomplish our financial objectives. To produce net interest income, the key
component of our revenues, and consistent earnings growth over the long-term, we
must generate loan and deposit growth at acceptable interest rate spreads within
our markets of operation. However, in the near term, reflecting the challenging
economic environment, we will continue to focus on managing our capital
resources. This means we are limiting our loan origination volume to control
risk weighted asset growth, and tightly controlling expenses in ways that we
believe avoid negative impact on our customers. To generate and grow loans and
deposits in the long run, we believe we must focus on a number of areas,
including but not limited to, the quality and breadth of our branch network, our
sales practices, customer and employee satisfaction and retention, technology,
product innovation, vendor relationships and competitive pricing of our
products. Net interest income is sensitive to our ability to attract and retain
lending officers, close loans in the pipeline and maintain asset quality at an
acceptable level. Failure in these areas could negatively affect our ability to
meet our goals. Our ability to attract and grow low cost deposits is also
important to fund loans and grow revenues and maintain adequate
liquidity.
We also
consider noninterest income important to our continued financial success. Fee
income generation is primarily related to our loan and deposit operations, such
as deposit service charges, fees from payment system products (interchange,
merchant services, ACH, check and credit card) and fees on sales of financial
products, including residential mortgages and trust and investment products.
Many of the products and services that generate fee income are offered through
relationships with third party providers, thus we are dependent on the
continuity of those relationships to continue this important source of
income.
While we
review and manage all customer segments, we have focused increased efforts on
four targeted areas: 1) high value consumers (including the mature market), 2)
smaller businesses with credit needs under $250,000, 3) medium-sized commercial
businesses with credit needs over $250,000 up to $20 million and 4) commercial
real estate businesses. We strive to maintain a local community-based management
philosophy in all of our branches. We will continue to emphasize
hiring local branch and
lending personnel with strong ties to the specific local communities we seek to
serve and with expertise in growing and servicing targeted business and consumer
customer segments.
To limit
the risks associated with doing business and growing revenues,
we have
put in place numerous
policies, processes and controls. We rely on these controls to produce
information for management and the public that is accurate and complete and to
help us to protect our assets. A failure or failures in our control environment
could have an adverse effect on our results of operations or financial
condition.
Financial Overview for Years Ended December 31, 2008, 2007 and 2006.
Our net loss for the full year 2008 was $6.3
million, as compared to income of $16.8 million in 2007 and $29.3 million in
2006. The loss per diluted share for the year ended December 31, 2008, was $.41,
while earnings per diluted share for 2007 and 2006 were $1.05, and $1.86,
respectively. Return on average equity declined to -3.06% in 2008 from 7.9% in
2007 and 16.5% in 2006. The provision for credit losses for the year ended
December 31, 2008, was $40.4 million compared to $38.9 million in 2007 and $2.7
million in 2006.
20
Income Statement
Overview
Net
Interest Income
. The following table displays
information on net interest income, average yields earned and rates paid, as
well as net interest spread and margin information on a tax equivalent basis for
the periods indicated. This information can be used to follow the changes in our
yields and rates and the changes in our earning assets and liabilities over the
past three years:
|
(Dollars in
thousands)
|
Year Ended December 31,
|
|
Increase (Decrease)
|
|
Percentage Change
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
08-07
|
|
07-06
|
|
08-07
|
|
07-06
|
|
Interest and fee income
(1)
|
$
|
142,597
|
|
|
$
|
184,831
|
|
|
$
|
152,358
|
|
|
$ (42,234
|
)
|
|
$
|
32,473
|
|
|
-22.85
|
%
|
|
21.31
|
%
|
|
Interest
expense
|
$
|
48,696
|
|
|
$
|
68,470
|
|
|
$
|
49,926
|
|
|
$ (19,774
|
)
|
|
$
|
18,544
|
|
|
-28.88
|
%
|
|
37.14
|
%
|
|
Net interest income
(1)
|
$
|
93,901
|
|
|
$
|
116,361
|
|
|
$
|
102,432
|
|
|
$ (22,460
|
)
|
|
$
|
13,929
|
|
|
-19.30
|
%
|
|
13.60
|
%
|
|
|
|
Average interest earning assets
|
$
|
2,409,896
|
|
|
$
|
2,394,958
|
|
|
$
|
2,066,217
|
|
|
$ 14,938
|
|
|
$
|
328,741
|
|
|
0.62
|
%
|
|
15.91
|
%
|
|
Average interest
bearing liabilities
|
$
|
1,876,083
|
|
|
$
|
1,821,299
|
|
|
$
|
1,525,683
|
|
|
$ 54,784
|
|
|
$
|
295,616
|
|
|
3.01
|
%
|
|
19.38
|
%
|
|
Average interest earning assets/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest bearing liabilities
|
|
128.45
|
%
|
|
|
131.50
|
%
|
|
|
135.43
|
%
|
|
-3.04
|
%
|
|
|
-3.93
|
%
|
|
|
|
|
|
|
|
Average yield
earned
(1)
|
|
5.92
|
%
|
|
|
7.72
|
%
|
|
|
7.37
|
%
|
|
-1.80
|
%
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
Average rate paid
|
|
2.60
|
%
|
|
|
3.76
|
%
|
|
|
3.27
|
%
|
|
-1.16
|
%
|
|
|
0.49
|
%
|
|
|
|
|
|
|
|
Net interest
spread
(1)
|
|
3.32
|
%
|
|
|
3.96
|
%
|
|
|
4.10
|
%
|
|
-0.64
|
%
|
|
|
-0.14
|
%
|
|
|
|
|
|
|
|
Net interest margin
(1)
|
|
3.90
|
%
|
|
|
4.86
|
%
|
|
|
4.96
|
%
|
|
-0.96
|
%
|
|
|
-0.10
|
%
|
|
|
|
|
|
|
(1)
Interest earned on nontaxable
securities has been computed on a 35% tax equivalent basis.
Net interest income on a tax equivalent basis totaled $93.9 million for
the year ended December 31, 2008, a decrease of $22.5 million, or 19.3%, from
$116.4 million for 2007, which by contrast was an increase of $13.9 million from
2006. The decrease in net interest income from 2007 to 2008 was mainly due to
declining loan yields caused by materially lower market interest rates which we
were unable to fully offset by reducing rates paid on deposits and borrowings.
The net interest margin decreased from 4.86% in 2007 to 3.90% in 2008 with the
main factors being interest reversals related to nonaccrual loans in the
two-step and other than two-step construction loan portfolios, lower
construction loan fees and balances, cost of funding nonperforming assets on our
balance sheet and the lag in the decline of deposit rates relative to the
decline in loan yields. The net interest margin was 4.96% in 2006.
Deposit rates and volumes in 2008 were affected by customers’ concerns
over the stability of the banking system, the failure of several financial
institutions and the uncertainty surrounding the U.S. Treasury Department’s
Troubled Assets Relief Plan (“TARP”) Capital Purchase Plan (“CPP”). Business
customers, in particular, allocated their funds among multiple banks.
Additionally, certain competitors paid high rates relative to market interest
rates to retain deposits. While the increase in FDIC deposit insurance limits in
October 2008 helped stabilize deposit volumes, the Company continued to
experience deposit decreases in certain time deposits and money market accounts
with large deposit balances. However, the number of deposit accounts continued
to grow in key core deposit categories.
Changing interest rate environments, including the slope, level of, and
changes in the yield curve, and competitive pricing pressure, could lead to
higher deposit costs, lower loan yields, reduced net interest margin and spread
and lower loan fees, all of which could lead to additional pressure on our net
interest income. At December 31, 2008, we remained asset sensitive, meaning that
earning assets mature or reprice more quickly than interest bearing liabilities
in a given time period. For more information on this topic, see “Quantitative
and Qualitative Disclosures about Market Risk” in Item 7A of this report below.
We stop recognizing interest on loans at such time as they are moved to
nonaccrual status. Interest income reversals may also be required at such time
and consequently decrease interest income. We expect the level of interest
reversals associated with borrowers defaulting on two-step loans to continue to
decline in 2009 compared to 2008, but increase for loans outside the two-step
portfolio and therefore to have some continued negative impact on net interest
income and net interest margin. We anticipate construction loan balances and
associated loan fee revenue will decline further in 2009. Additionally, the cost
of funding nonaccruing loans and OREO and the lower value of noninterest bearing
deposits in an anticipated low interest rate environment are projected to put
continued pressure on our net interest margin in 2009.
21
Average Balances and Average Rates Earned and
Paid.
The following table sets forth,
for the periods indicated, information with regard to (1) average balances of
assets and liabilities, (2) the total dollar amounts of interest income on
interest earning assets and interest expense on interest bearing liabilities,
(3) resulting yields and rates, (4) net interest income and (5) net interest
spread. Nonaccrual loans have been included in the tables as loans carrying a
zero yield. Loan fees are recognized as income using the interest method over
the life of the loan.
|
|
Year Ended December 31,
|
|
(Dollars in
thousands)
|
2008
|
|
2007
|
|
2006
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Interest
|
|
Yield/
|
|
Outstanding
|
|
Interest
|
|
Yield/
|
|
Outstanding
|
|
Interest
|
|
Yield/
|
|
|
Balance
|
|
Earned/ Paid
|
|
Rate
(1)
|
|
Balance
|
|
Earned/ Paid
|
|
Rate
(1)
|
|
Balance
|
|
Earned/ Paid
|
|
Rate
(1)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due from banks
|
$
|
2,333
|
|
|
$
|
38
|
|
|
1.63
|
%
|
|
$
|
1,217
|
|
|
$
|
51
|
|
4.19
|
%
|
|
$
|
2,118
|
|
|
$
|
109
|
|
5.15
|
%
|
|
Federal funds
sold
|
|
16,867
|
|
|
|
340
|
|
|
2.02
|
%
|
|
|
10,813
|
|
|
|
513
|
|
4.74
|
%
|
|
|
15,139
|
|
|
|
759
|
|
5.01
|
%
|
|
Taxable securities
(2)
|
|
157,648
|
|
|
|
7,700
|
|
|
4.88
|
%
|
|
|
207,782
|
|
|
|
10,398
|
|
5.00
|
%
|
|
|
228,434
|
|
|
|
10,840
|
|
4.75
|
%
|
|
Nontaxable securities
(3)
|
|
83,826
|
|
|
|
5,002
|
|
|
5.97
|
%
|
|
|
76,799
|
|
|
|
4,689
|
|
6.11
|
%
|
|
|
70,324
|
|
|
|
4,457
|
|
6.34
|
%
|
|
Loans, including fees
(4)
|
|
2,149,222
|
|
|
|
129,517
|
|
|
6.03
|
%
|
|
|
2,098,347
|
|
|
|
169,180
|
|
8.06
|
%
|
|
|
1,750,202
|
|
|
|
136,193
|
|
7.78
|
%
|
|
Total interest earning assets
|
|
2,409,896
|
|
|
|
142,597
|
|
|
5.92
|
%
|
|
|
2,394,958
|
|
|
|
184,831
|
|
7.72
|
%
|
|
|
2,066,217
|
|
|
|
152,358
|
|
7.37
|
%
|
|
|
|
Allowance for loan
losses
|
|
(38,328
|
)
|
|
|
|
|
|
|
|
|
|
(26,243
|
)
|
|
|
|
|
|
|
|
|
(21,495
|
)
|
|
|
|
|
|
|
|
Premises and equipment
|
|
34,141
|
|
|
|
|
|
|
|
|
|
|
32,598
|
|
|
|
|
|
|
|
|
|
30,300
|
|
|
|
|
|
|
|
|
Other assets
|
|
163,910
|
|
|
|
|
|
|
|
|
|
|
136,405
|
|
|
|
|
|
|
|
|
|
118,607
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
2,569,619
|
|
|
|
|
|
|
|
|
|
$
|
2,537,718
|
|
|
|
|
|
|
|
|
$
|
2,193,629
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
$
|
279,227
|
|
|
$
|
1,963
|
|
|
0.70
|
%
|
|
$
|
278,734
|
|
|
$
|
3,436
|
|
1.23
|
%
|
|
$
|
259,053
|
|
|
$
|
2,224
|
|
0.86
|
%
|
|
Savings
|
|
71,542
|
|
|
|
578
|
|
|
0.81
|
%
|
|
|
72,787
|
|
|
|
569
|
|
0.78
|
%
|
|
|
80,029
|
|
|
|
459
|
|
0.57
|
%
|
|
Money market
|
|
658,360
|
|
|
|
14,633
|
|
|
2.22
|
%
|
|
|
665,037
|
|
|
|
24,953
|
|
3.75
|
%
|
|
|
558,734
|
|
|
|
19,112
|
|
3.42
|
%
|
|
Time deposits
|
|
566,195
|
|
|
|
20,375
|
|
|
3.60
|
%
|
|
|
554,263
|
|
|
|
26,078
|
|
4.70
|
%
|
|
|
457,077
|
|
|
|
19,132
|
|
4.19
|
%
|
|
Short-term borrowings
(5)
|
|
149,016
|
|
|
|
4,312
|
|
|
2.89
|
%
|
|
|
136,731
|
|
|
|
7,057
|
|
5.16
|
%
|
|
|
66,139
|
|
|
|
3,356
|
|
5.07
|
%
|
|
Long-term borrowings
(6)
|
|
151,743
|
|
|
|
6,835
|
|
|
4.50
|
%
|
|
|
113,747
|
|
|
|
6,377
|
|
5.61
|
%
|
|
|
104,651
|
|
|
|
5,643
|
|
5.39
|
%
|
|
Total
interest bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
1,876,083
|
|
|
|
48,696
|
|
|
2.60
|
%
|
|
|
1,821,299
|
|
|
|
68,470
|
|
3.76
|
%
|
|
|
1,525,683
|
|
|
|
49,926
|
|
3.27
|
%
|
|
Demand deposits
|
|
470,601
|
|
|
|
|
|
|
|
|
|
|
479,311
|
|
|
|
|
|
|
|
|
|
466,282
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
16,409
|
|
|
|
|
|
|
|
|
|
|
24,759
|
|
|
|
|
|
|
|
|
|
24,016
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
2,363,093
|
|
|
|
|
|
|
|
|
|
|
2,325,369
|
|
|
|
|
|
|
|
|
|
2,015,981
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
206,526
|
|
|
|
|
|
|
|
|
|
|
212,349
|
|
|
|
|
|
|
|
|
|
177,648
|
|
|
|
|
|
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders’ equity
|
$
|
2,569,619
|
|
|
|
|
|
|
|
|
|
$
|
2,537,718
|
|
|
|
|
|
|
|
|
$
|
2,193,629
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
93,901
|
|
|
|
|
|
|
|
|
|
$
|
116,361
|
|
|
|
|
|
|
|
|
$
|
102,432
|
|
|
|
|
Net interest
spread
|
|
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
|
3.96
|
%
|
|
|
|
|
|
|
|
|
4.10
|
%
|
|
|
|
Net interest
margin
|
|
|
|
|
|
|
|
|
3.90
|
%
|
|
|
|
|
|
|
|
|
4.86
|
%
|
|
|
|
|
|
|
|
|
4.96
|
%
|
|
(1)
|
Yield/rate calculations have been
based on more detailed information and therefore may not recompute exactly
due to rounding.
|
|
(2)
|
Includes Federal Home Loan Bank
stock balances.
|
|
(3)
|
Interest earned on nontaxable
securities has been computed on a 35% tax equivalent basis. The tax
equivalent basis adjustment for the years ended December 31, 2008, 2007
and 2006, was $1.8 million, $1.6 million and $1.6 million, respectively.
|
|
(4)
|
Includes balances of loans held
for sale and nonaccrual loans.
|
|
(5)
|
The maximum amount of short-term
borrowings was $266.3 million and $193.5 million for the years ended
December 31, 2008 and 2007, respectively.
|
|
(6)
|
Includes junior
subordinated debentures with average balance of $51 million for 2008 and
$50 million for 2007.
|
Our net
interest margin declined 96 basis points from 2007 to 2008 due primarily to
lower market interest rates, the effect of a materially lower volume of interest
accruing construction loans, interest reversals on two-step loans and a higher
balance of nonperforming construction loans in our loan portfolio. Also interest
earning assets re-priced more quickly than our interest bearing liabilities in
the decreasing rate environment during 2008, leading to additional pressure on
the net interest margin. From 2006 to 2007 our net interest margin decreased by
10 basis points.
22
Net
Interest Income – Changes Due to Rate and Volume.
The following table sets
forth the dollar amounts of the changes in consolidated net interest income
attributable to changes in volume and to changes in interest rates. Changes not
due solely to volume or rate and changes due to new product lines, if any, are
allocated to volume.
|
(Dollars in
thousands)
|
Year Ended December 31,
|
|
|
2008 compared to 2007
|
|
2007 compared to 2006
|
|
|
|
|
Increase (Decrease) due to:
|
|
Total
Increase
|
|
Increase (Decrease) due to:
|
|
Total
Increase
|
|
|
Volume
|
|
Yield/Rate
|
|
(Decrease)
|
|
Volume
|
|
Yield/Rate
|
|
(Decrease)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning
balances due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from banks
|
$
|
47
|
|
|
$
|
(60
|
)
|
|
$
|
(13
|
)
|
|
$
|
(38
|
)
|
|
$
|
(20
|
)
|
|
$
|
(58
|
)
|
|
Federal funds sold
|
|
287
|
|
|
|
(460
|
)
|
|
|
(173
|
)
|
|
|
(205
|
)
|
|
|
(41
|
)
|
|
|
(246
|
)
|
|
Investment
security income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on taxable
securities
|
|
(2,723
|
)
|
|
|
25
|
|
|
|
(2,698
|
)
|
|
|
(1,132
|
)
|
|
|
690
|
|
|
|
(442
|
)
|
|
Interest on nontaxable securities
(1)
|
|
429
|
|
|
|
(115
|
)
|
|
|
314
|
|
|
|
395
|
|
|
|
(163
|
)
|
|
|
232
|
|
|
Loans, including fees on loans
|
|
2,396
|
|
|
|
(42,059
|
)
|
|
|
(39,663
|
)
|
|
|
30,741
|
|
|
|
2,246
|
|
|
|
32,987
|
|
|
Total interest income
(1)
|
|
436
|
|
|
|
(42,669
|
)
|
|
|
(42,233
|
)
|
|
|
29,761
|
|
|
|
2,712
|
|
|
|
32,473
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
demand
|
|
6
|
|
|
|
(1,479
|
)
|
|
|
(1,473
|
)
|
|
|
243
|
|
|
|
969
|
|
|
|
1,212
|
|
|
Savings
|
|
(9
|
)
|
|
|
19
|
|
|
|
10
|
|
|
|
(57
|
)
|
|
|
166
|
|
|
|
109
|
|
|
Money
Market
|
|
(236
|
)
|
|
|
(10,085
|
)
|
|
|
(10,321
|
)
|
|
|
4,010
|
|
|
|
1,832
|
|
|
|
5,842
|
|
|
Time deposits
|
|
632
|
|
|
|
(6,335
|
)
|
|
|
(5,703
|
)
|
|
|
4,589
|
|
|
|
2,357
|
|
|
|
6,946
|
|
|
Short-term
borrowings
|
|
634
|
|
|
|
(3,379
|
)
|
|
|
(2,745
|
)
|
|
|
3,644
|
|
|
|
57
|
|
|
|
3,701
|
|
|
Long-term borrowings
(2)
|
|
2,130
|
|
|
|
(1,672
|
)
|
|
|
458
|
|
|
|
176
|
|
|
|
558
|
|
|
|
734
|
|
|
Total interest expense
|
|
3,157
|
|
|
|
(22,931
|
)
|
|
|
(19,774
|
)
|
|
|
12,605
|
|
|
|
5,939
|
|
|
|
18,544
|
|
|
Increase (decrease) in net interest income
(1)
|
$
|
(2,721
|
)
|
|
$
|
(19,738
|
)
|
|
$
|
(22,459
|
)
|
|
$
|
17,156
|
|
|
$
|
(3,227
|
)
|
|
$
|
13,929
|
|
|
(1)
|
Tax exempt income has been
adjusted to a tax-equivalent basis using a 35% tax equivalent
basis.
|
|
(2)
|
Long-term borrowings include
junior subordinated debentures.
|
For the year
ended December 31, 2008, net interest income on a tax equivalent basis was $93.9
million, a decline of $22.5 million from 2007. The decline in net interest
income was mainly attributable to a 96 basis point decline in the net interest
margin but a decline in average earning assets also contributed. The net
interest margin contraction was a result of the declining benefit of noninterest
bearing deposits as market rates declined and a 64 basis point contraction in
the net interest spread. Also, lower real estate construction loan fees and
higher interest reversals reduced the net interest margin. Moreover, the net
interest margin was also affected by our inability to match the large decline in
the Federal Funds rate with a corresponding reduction in deposit and borrowing
costs due to market conditions. In 2006, net interest income on a tax equivalent
basis was $102.4 million.
Lower loan yields, lower loan fees, interest reversals, especially in the
real estate construction portfolio, and higher nonaccrual loan balances, also
primarily in the construction portfolio, were the main drivers in the $42
million decline in interest income. Lower deposit rates only partially offset
the decline in interest income resulting in a $22.5 million decline in net
interest income.
High levels of nonperforming assets, and the cost of funding those
assets, and declining loan yields compressing against already low cost of
funding are projected to put continued pressure on our net interest margin and
net interest income in 2009.
Provision for Credit Losses
. The provision for credit losses is comprised of two components, a
provision for loans losses related to outstanding loans and a provision for
unfunded commitments to address increases in our reserve for unfunded
commitments. The provision for credit losses is recorded to bring the allowance
for loan losses and the reserve for unfunded commitments to amounts considered
appropriate by management based on factors which are described in the “Credit
Management” and “Allowance for Credit Losses and Net Loan Charge-offs” sections
of this report.
23
Provisions for credit losses of $40.4 million, $38.9 million, and $2.7
million, were recorded for the years ended December 31, 2008, 2007 and 2006,
respectively, while net loan charge-offs were $65.3 million, $7.1 million, and
$1.1 million, over those same years. The provision for credit losses in 2008
included a provision for loans other than two-step loans of $30.9 million, up
from $8.0 million in 2007, primarily due to adverse risk rating migrations and
higher net charge-offs in this portfolio. The increase in the provision for
credit losses other than two-step in 2008 was mainly caused by deterioration in
the residential construction portfolio caused by the continued weak housing
market. The 2008 provision relating to two-step loans was $9.5 million of which
$4.8 million was recorded in the fourth quarter. The 2007 provision for credit
losses included a fourth quarter provision of $30 million, of which $27.8
million related to the two-step loan portfolio. During 2007 we had a greater
proportion of our loan portfolio in construction loans than in 2006, which
resulted in greater provisioning as well. Construction loans involve a higher
inherent risk profile and are therefore allocated a higher provision for loan
losses relative to most other loans in the portfolio
Noninterest
Income
. Noninterest income remains a key
focus for Bancorp, particularly revenues generated by our deposit accounts and
payment systems products. Our noninterest income for the year ended December 31,
2008, was $24.6 million down $8.9 million or 27%, compared to $33.5 million in
2007, which was up 19% from $28.1 million in 2006. This decrease predominantly
reflected a $6.3 million pretax other-than-temporary impairment (“OTTI”) charge
recorded during third quarter 2008 related to our investments in Freddie Mac
preferred stock, a Lehman Brothers bond, and two pooled trust preferred
securities. Service charges on deposit accounts were up $2.6 million, or over
20%, in 2008 and payment systems related revenues increased 13% or $1.0 million
compared to 2007. These increases resulted from successful product
introductions, new branch locations and marketing efforts and market conditions
that increased the number of transaction deposit accounts. In addition, we
increased the number of debit and credit card sales to our customer base. In
2008, gains on sales of loans were $2.3 million, down 31% from $3.4 million for
2007. Trust and investment service revenue declined 15% or $1.0 million in 2008
compared to 2007 due to the decline in the equity market and a challenging
environment for investment sales. Increased competition and other competitive
factors and regulatory changes could adversely affect our ability to sustain fee
generation.
Noninterest Expense
. Noninterest
expense was $90.3 million in 2008, $85.3 in 2007, and $81.7 million in 2006.
Noninterest expense increased $5.0 million, or 6% in 2008 compared to 2007.
Personnel expenses decreased $2.3 million, or 5%, in 2008 compared to 2007 due
to the elimination of bonuses, no employer match under our 401(k) plan, and
staff reductions. The decline in personnel costs was more than offset by a $2.0
million increase in FDIC insurance premiums and the $3.9 million in additional
expense associated with the two-step program, including personnel, legal and
other collections, holding and disposition expenses. Occupancy expense was $9.4
million in 2008, an increase of 10%, compared to $8.5 million in 2007, with the
10% increase in 2008 primarily caused by the addition of new locations and
annual rent increases. Marketing expenses decreased $.9 million in 2008 due to
decreased promotional expenses largely relating to the high performance checking
products.
In
response to the challenging economic environment, management has recently
initiated a number of actions which are expected to reduce operating expenses
when fully implemented. For example, there are continuing efforts to align
personnel and other expenses with the reduced economic activity, including lower
volumes of real estate transactions, within our markets. Also, in the third
quarter of 2008, the Company implemented a Go Green project initiative. The
Company encouraged all employees to enroll in iPay Paperless Payroll, has teamed
with an outside vendor to encourage customers to enroll in eStatements and
Online Bill Pay, and has implemented a secure email site. The Company also
re-engineered its work flows to eliminate a nightly courier run. These
initiatives are being implemented in a way that we believe best limits the
impact on customer service. In an effort to partially offset elevated OREO
operating expenses and higher FDIC insurance premiums in 2009, the Company will
continue to identify opportunities to reduce personnel costs and lower operating
expenses that are consistent with the reduced business activity that has
occurred and which is expected to continue in the near term. We expect
noninterest expenses associated with nonperforming two-step assets to gradually
decline in 2009 compared to 2008 and expense associated with OREO outside the
two-step category to increase in 2009.
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, unexpected increases in OREO expenses, or a
failure to manage our operating and control environments could adversely affect
our ability to limit expense growth in the future.
Income
Taxes
. The Company recorded a benefit from
income taxes of $7.6 million for 2008, compared to tax expense of $7.1 million
for 2007 due primarily to the $13.9 million pretax loss in 2008. For more
information regarding Bancorp’s income taxes, see Note 13 “Income Taxes” to the
Company’s audited financial statements included under “Financial Statements and
Supplementary Data” in Item 8 of this report.
24
Balance Sheet Overview
Period end
total assets were $2.5 billion as of December 31, 2008, down from $2.6 billion
at December 31, 2007. Period end total loans decreased by 5% or $108 million
since December 31, 2007 due to the $210 million, or 80%, decline in the two-step
loan balances during 2008. Total deposits decreased 3% or $70 million in the
same period. Our balance sheet management efforts are focused on capital
preservation, while also seeking loan and core deposit growth in targeted areas
that support our corporate objectives and include:
Given the weak economy and housing market in our operating area, the
focus of residential housing developers and builders is to sell existing
inventory to repay debt and not pursue new projects. Combined with our plan not
to solicit additional business for residential construction projects until the
market inventory is in balance with market demand this is expected to cause our
overall construction loan portfolio to continue to contract in 2009. We also
anticipate a more cautious approach to extending new credit in the commercial
construction, non-owner occupied commercial real estate and housing related
commercial loan categories. Our ability to achieve loan and deposit growth in
the future will be dependent on many factors, including the effects of
competition, health of the real estate market, economic conditions in our
markets, retention of key personnel and valued customers, and our ability to
close loans in the pipeline.
The $70 million decrease in deposits was due primarily to weak economic
conditions and changing consumer deposit behaviors caused by those conditions.
In order to
generate core deposits, we put an emphasis on launching transaction and
depository services to satisfy the cash and deposit transaction needs of
business customers. Our success in retaining low cost demand deposit balances
over this past year can also be attributed to the continued emphasis on our free
checking products for both the business and consumer segments. Customer demand
deposit balances and the attractiveness of interest bearing deposit products,
such as money market and time deposit products, are influenced by the level and
shape of the yield curve. This, in turn, influences whether we pursue time
deposits or other funding sources on a short term basis
Despite
significantly lower loan growth amongst our competitors, the competition for
deposit funding has and continues to be intense. Due to heightened uncertainty
about stability of the banking system larger deposit customers are diversifying
balances among multiple banks. Moreover, new entrants into banking, as a result
of their recent grants of bank holding company status, are also aggressively
pursuing FDIC insured deposits as a new source of funds. These factors have not
only impacted volume but also the cost of deposit funding. A sustained fierce
competitive environment and customer concerns regarding the safety of their
deposits could hinder our efforts to retain and grow our deposit base in the
future.
Investment Portfolio
The following table shows the amortized cost and fair value of Bancorp’s
investment portfolio. At December 31, 2008, Bancorp had no securities classified
as held to maturity.
|
|
December 31, 2008
|
|
December 31, 2007
|
|
|
Amortized
|
|
|
|
|
Unrealized
|
|
Amortized
|
|
|
|
|
Unrealized
|
|
(Dollars in
thousands)
|
Cost
|
|
Fair Value
|
|
Gain/(Loss)
|
|
Cost
|
|
Fair Value
|
|
Gain/(Loss)
|
|
U.S. Treasury securities
|
$
|
200
|
|
$
|
223
|
|
|
23
|
|
|
$
|
200
|
|
$
|
207
|
|
$
|
7
|
|
|
U.S. Government
agency securities
|
|
7,310
|
|
|
7,387
|
|
|
77
|
|
|
|
60,554
|
|
|
61,557
|
|
|
1,003
|
|
|
Corporate securities
|
|
12,608
|
|
|
10,877
|
|
|
(1,731
|
)
|
|
|
20,201
|
|
|
19,568
|
|
|
(633
|
)
|
|
Mortgage-backed
securities
|
|
94,846
|
|
|
92,566
|
|
|
(2,280
|
)
|
|
|
85,050
|
|
|
84,197
|
|
|
(853
|
)
|
|
Obligations of state and political subdivisions
|
|
81,025
|
|
|
82,398
|
|
|
1,373
|
|
|
|
85,876
|
|
|
86,106
|
|
|
230
|
|
|
Equity
investments and other securities
|
|
5,161
|
|
|
5,064
|
|
|
(97
|
)
|
|
|
7,963
|
|
|
7,495
|
|
|
(468
|
)
|
|
Total Investment Portfolio
|
$
|
201,150
|
|
$
|
198,515
|
|
$
|
(2,635
|
)
|
|
$
|
259,844
|
|
$
|
259,130
|
|
$
|
(714
|
)
|
At December 31, 2008, the estimated fair value of the investment
portfolio was $198.5 million, compared to $259.1 million at 2007 year end, a
decrease of $60.6 million, or 23%. The net unrealized loss on the investment
portfolio was $2.6 million at December 31, 2008, representing 1.3% of the total
portfolio compared to $.7 million and .3%, respectively, at year end 2007.
Bancorp regularly reviews its investment portfolio to determine whether any of
its securities are other than temporarily impaired. In addition to accounting
and regulatory guidance, in determining whether a security is other-than
temporarily impaired, Bancorp periodically considers the duration and amount of
each unrealized loss, the financial condition of the issuer and the prospects
for a change in market value within a reasonable period of time.
At December 31, 2008, the Company determined there were no OTTI
securities in the investment portfolio.
25
In the third
quarter of 2008, the Company recorded OTTI charges totaling $6.3 million
pre-tax, $.4 million relating to an investment in a Lehman Brothers bond and
$3.1 million related to two pooled trust preferred investments in our corporate
securities portfolio, and $2.8 million for an investment in Freddie Mac
preferred stock held in our equity and other securities portfolio. In reaching
the determination to record these impairments management reviewed the facts and
circumstances surrounding the securities, including the duration and amount of
the unrealized loss, the financial condition of the issuer and the prospects for
a change in market value within a reasonable period of time. For example,
factors that led management to conclude that the pooled trust preferred
securities were OTTI included, among others, estimated fair market values
significantly below our carrying value caused by increased credit spreads and
the absence of liquidity. Based on its assessment, management determined that
the impairment was OTTI in accordance with GAAP and that charges were
appropriate. Government programs, including the TARP, may provide capital to
financial institutions that could, in turn, reduce the perceived and actual risk
of pooled trust preferred securities, improving their market value and
liquidity. Due to current market conditions these securities do not have a
liquid market at this time.
For more information regarding Bancorp’s fair value calculations, see
Note 21 “Fair Value Measurement” to the Company’s audited financial statements
included under “Financial Statements and Supplementary Data” in Item 8 of this
report.
The following table summarizes the contractual maturities and weighted
average yields on Bancorp’s investment securities:
|
|
|
|
|
|
|
|
After
|
|
|
|
|
After
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
One
year
|
|
|
|
|
One
through
|
|
|
|
|
Five
through
|
|
|
|
|
Due
after
|
|
|
|
|
|
|
|
|
|
|
|
or less
|
|
Yield
|
|
five years
|
|
Yield
|
|
ten years
|
|
Yield
|
|
ten years
|
|
Yield
|
|
Total
|
|
Yield
|
|
U.S. Treasury securities
|
$
|
-
|
|
-
|
|
|
$
|
223
|
|
4.51
|
%
|
|
$
|
-
|
|
-
|
|
|
$
|
-
|
|
-
|
|
|
$
|
223
|
|
4.51
|
%
|
|
U.S. Government
agency securities
|
|
6,191
|
|
5.32
|
%
|
|
|
1,196
|
|
3.63
|
%
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
7,387
|
|
5.05
|
%
|
|
Obligations of state and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political subdivisions
(1)
|
|
2,649
|
|
6.44
|
%
|
|
|
25,411
|
|
5.99
|
%
|
|
|
37,506
|
|
5.79
|
%
|
|
|
16,832
|
|
7.17
|
%
|
|
|
82,398
|
|
6.16
|
%
|
|
Other securities
(2)
|
|
2
|
|
6.16
|
%
|
|
|
15,213
|
|
3.93
|
%
|
|
|
39,151
|
|
5.00
|
%
|
|
|
54,141
|
|
4.97
|
%
|
|
|
108,507
|
|
4.84
|
%
|
|
Total
(1)
|
$
|
8,842
|
|
5.66
|
%
|
|
$
|
42,043
|
|
5.17
|
%
|
|
$
|
76,657
|
|
5.39
|
%
|
|
$
|
70,973
|
|
5.49
|
%
|
|
$
|
198,515
|
|
5.39
|
%
|
|
(1)
|
Yields are stated on a federal
tax equivalent basis at 35%.
|
|
(2)
|
Does not reflect anticipated
maturity from prepayments on mortgage-based and asset-based securities.
Anticipated lives are significantly shorter than contractual
maturities.
|
The average life of Bancorp’s investment portfolio decreased from 4.7
years at December 31, 2007 to 4.3 years at December 31, 2008. Management may
consider selling certain securities and realizing gains and/or losses in the
Company’s investment portfolio on an on-going basis as part of Bancorp’s overall
business strategy. For more information regarding Bancorp’s investment
securities, see Note 3 “Investments Securities” to the Company’s audited
financial statements included under “Financial Statements and Supplementary
Data” in Item 8 of this report.
26
Loan Portfolio
The following
table provides the composition of the loan portfolio and the balance of our
allowance for loan losses for the periods shown:
|
|
December 31,
|
|
(Dollars in
thousands)
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Commercial
|
$
|
482,405
|
|
|
23
|
%
|
|
$
|
504,101
|
|
|
23
|
%
|
|
$
|
463,188
|
|
|
24
|
%
|
|
$
|
364,604
|
|
|
23
|
%
|
|
$
|
357,776
|
|
|
25
|
%
|
|
Real estate
construction
|
|
285,149
|
|
|
14
|
%
|
|
|
517,988
|
|
|
24
|
%
|
|
|
365,954
|
|
|
19
|
%
|
|
|
210,828
|
|
|
14
|
%
|
|
|
116,974
|
|
|
8
|
%
|
|
Real estate mortgage
|
|
393,208
|
|
|
19
|
%
|
|
|
330,803
|
|
|
15
|
%
|
|
|
287,495
|
|
|
15
|
%
|
|
|
242,015
|
|
|
15
|
%
|
|
|
212,959
|
|
|
15
|
%
|
|
Commercial real
estate
|
|
882,092
|
|
|
43
|
%
|
|
|
796,622
|
|
|
37
|
%
|
|
|
804,865
|
|
|
41
|
%
|
|
|
709,176
|
|
|
45
|
%
|
|
|
704,390
|
|
|
49
|
%
|
|
Installment and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consumer
|
|
21,942
|
|
|
1
|
%
|
|
|
23,155
|
|
|
1
|
%
|
|
|
26,188
|
|
|
1
|
%
|
|
|
27,831
|
|
|
2
|
%
|
|
|
35,895
|
|
|
3
|
%
|
|
Total
loans
|
|
2,064,796
|
|
|
100
|
%
|
|
|
2,172,669
|
|
|
100
|
%
|
|
|
1,947,690
|
|
|
100
|
%
|
|
|
1,554,454
|
|
|
100
|
%
|
|
|
1,427,994
|
|
|
100
|
%
|
|
|
|
Allowance for loan losses
|
|
(28,920
|
)
|
|
1.40
|
%
|
|
|
(46,917
|
)
|
|
2.16
|
%
|
|
|
(23,017
|
)
|
|
1.18
|
%
|
|
|
(20,469
|
)
|
|
1.32
|
%
|
|
|
(18,971
|
)
|
|
1.33
|
%
|
|
|
|
Total
loans, net
|
$
|
2,035,876
|
|
|
|
|
|
$
|
2,125,752
|
|
|
|
|
|
$
|
1,924,673
|
|
|
|
|
|
$
|
1,533,985
|
|
|
|
|
|
$
|
1,409,023
|
|
|
|
|
The Company’s loan portfolio was $2.1 billion at December 31, 2008, a
decrease of $108 million or 5% from December 31, 2007. Total real estate
construction loans contracted $232.8 million, or 45%, in 2008 compared to 2007,
in part due to the significant weakness in the residential housing market in our
region. Loan growth outside the construction portfolio was 8% driven by growth
in commercial real estate and residential mortgage categories.
Interest and fees earned on our loan portfolio is our primary source of
revenue, and a decline in loan originations will have a negative impact on loan
balances, interest income, and loan fees earned. We anticipate continued
weakness in the economy and housing market to result in construction loan
balances declining further in 2009, and thus put continued downward pressure on
loan related revenues.
The following table presents the maturity distribution and interest rate
sensitivity of the Company’s loan portfolio by category at December 31, 2008:
|
(Dollars in
thousands)
|
Commercial
|
|
Real
Estate
|
|
Real
Estate
|
|
Real
Estate
|
|
Installment
|
|
|
|
|
|
Loans
|
|
Construction
|
|
Mortgage
|
|
Commercial
|
|
and other
|
|
Total
|
|
Maturity distribution:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
$
|
263,685
|
|
$
|
270,907
|
|
$
|
37,509
|
|
$
|
68,635
|
|
$
|
5,461
|
|
$
|
646,197
|
|
Due after one through
five years
|
|
159,698
|
|
|
3,590
|
|
|
72,749
|
|
|
70,436
|
|
|
7,044
|
|
|
313,517
|
|
Due after five years
|
|
59,022
|
|
|
10,652
|
|
|
282,950
|
|
|
743,021
|
|
|
9,437
|
|
|
1,105,082
|
|
Total
|
$
|
482,405
|
|
$
|
285,149
|
|
$
|
393,208
|
|
$
|
882,092
|
|
$
|
21,942
|
|
$
|
2,064,796
|
|
Interest rate
sensitivity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-interest rate
loans
|
$
|
130,551
|
|
$
|
59,254
|
|
$
|
140,551
|
|
$
|
180,381
|
|
$
|
10,640
|
|
$
|
521,377
|
|
Floating or adjustable interest
rate loans
(2)
|
|
351,854
|
|
|
225,895
|
|
|
252,657
|
|
|
701,711
|
|
|
11,302
|
|
|
1,543,419
|
|
Total
|
$
|
482,405
|
|
$
|
285,149
|
|
$
|
393,208
|
|
$
|
882,092
|
|
$
|
21,942
|
|
$
|
2,064,796
|
|
(1)
|
The table is based on stated
maturity, not expected maturity or duration.
|
|
(2)
|
Certain loans contain provisions
which place maximum or minimum limits on interest rates or interest rate
changes. Adjustable rate loans include all loans whose rates change
annually or more frequently and also includes certain loans whose rates
change less frequently than annually.
|
Loans held for
sale at December 31, 2008, were $2.9 million compared to $3.2 million at
December 31, 2007. The majority of our loan sales are residential real estate
mortgage loans and the guaranteed portion of SBA loans. These loans are
generally sold on an individual basis. Residential real estate mortgage loans
have been sold without retaining servicing rights or obligations. The guaranteed
portions of SBA loans have been sold from time to time, with servicing rights
and obligations usually retained.
As of December 31, 2008, and 2007, we had $22.9 million and $18.9
million, respectively, in outstanding loans to persons serving as directors,
senior officers, principal stockholders and their related interests. These loans
were made substantially on the same terms, including interest rates, maturities
and collateral, as those made to other customers of the Bank. At December 31,
2008, and 2007, the Bank had no banker’s acceptances. Below is a discussion of
our loan portfolio by category.
27
Commercial.
Expanding our commercial
and industrial loan portfolio, along with business deposits, has been a major
component of our strategic initiatives since 2000 and continues today. The $22
million, or 4%, decline in this portfolio in 2008 was a direct reflection of the
adverse economic conditions. Additionally, the Company exercised its right to
exit certain credit relationships with increased risk profiles. At year end
2008, the commercial loan line utilization was consistent with past seasonality
trends. Notwithstanding the decline in our commercial portfolio, we believe
continued development of our treasury management product line, including our
iDeposit product, enhance our ability to attract and retain commercial lending
and core deposit relationships which are an integral part of our business
strategy. We also believe that our branch network continues to be an important
point of service contact for our commercial relationships.
Real
Estate Construction.
The composition of real
estate construction loans as of December 31, 2008, 2007, and 2006 is presented
in the following table:
|
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
(Dollars in
thousands)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Commercial construction
|
|
$
|
92,615
|
|
|
32
|
%
|
|
$
|
90,670
|
|
|
17
|
%
|
|
$
|
63,592
|
|
|
17
|
%
|
|
Two-step
residential construction to individuals
|
|
|
53,084
|
|
|
19
|
%
|
|
|
262,952
|
|
|
51
|
%
|
|
|
171,692
|
|
|
47
|
%
|
|
Residential construction to builder
|
|
|
71,296
|
|
|
25
|
%
|
|
|
80,737
|
|
|
16
|
%
|
|
|
62,709
|
|
|
17
|
%
|
|
Residential
subdivision or site development
|
|
|
68,485
|
|
|
24
|
%
|
|
|
84,620
|
|
|
16
|
%
|
|
|
70,351
|
|
|
20
|
%
|
|
Net deferred fees
|
|
|
(331
|
)
|
|
0
|
%
|
|
|
(991
|
)
|
|
0
|
%
|
|
|
(2,390
|
)
|
|
-1
|
%
|
|
Total real estate construction loans
|
|
$
|
285,149
|
|
|
100
|
%
|
|
$
|
517,988
|
|
|
100
|
%
|
|
$
|
365,954
|
|
|
100
|
%
|
At
December 31, 2008, real estate construction loans were $285 million, down $233
million or 45% compared to $518 million at December 31, 2007. The total real
estate construction portfolio represented approximately 14% of the Company’s
total loan portfolio at year end 2008, down from 24% at December 31, 2007. The
majority of the decline in the construction portfolio was caused by the 80%
contraction in the two-step residential construction portfolio. A decline in
residential construction lending to builders and residential subdivision or site
development loans also contributed to the overall decline in the total real
estate construction portfolio. The commercial construction portfolio remained
relatively flat in 2008, and accounted for 32% of the total real estate
construction portfolio, up from 17% at year end 2007.
Real Estate
Mortgage
. The following table presents
the components of our real estate mortgage loan portfolio:
|
|
|
December 31, 2008
|
|
December 31, 2007
|
|
Change
|
|
September 30, 2008
|
|
(Dollars in
thousands)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Standard mortgage
|
|
$
|
87,628
|
|
22
|
%
|
|
$
|
86,901
|
|
26
|
%
|
|
$
|
727
|
|
1
|
%
|
|
$
|
89,348
|
|
23
|
%
|
|
Nonstandard
mortgage loan
|
|
|
32,597
|
|
8
|
%
|
|
|
7,495
|
|
2
|
%
|
|
|
25,102
|
|
335
|
%
|
|
|
33,820
|
|
9
|
%
|
|
Home equity loans and lines of credit
|
|
|
272,983
|
|
70
|
%
|
|
|
236,407
|
|
72
|
%
|
|
|
36,576
|
|
15
|
%
|
|
|
266,385
|
|
68
|
%
|
|
Total real estate mortgage
|
|
$
|
393,208
|
|
100
|
%
|
|
$
|
330,803
|
|
100
|
%
|
|
$
|
62,405
|
|
19
|
%
|
|
$
|
389,553
|
|
100
|
%
|
At
December 31, 2008, real estate mortgage loan balances were $393.2 million or
approximately 19% of the Company’s total loan portfolio. Of that amount, $32.6
million, or 8%, was nonstandard mortgage loans, an increase of $25.1 million
over year end 2007. In late 2007, we developed a set of mortgage loan products
to provide bridge financing and permanent mortgage loans, collectively called
nonstandard mortgage loans, to motivated borrowers with maturing loans
originally issued in our two-step loan program. This product was designed to
assist two-step borrowers in their transition from a construction loan to
permanent financing. Financing terms are generally more flexible than our
standard products. At December 31, 2008, the balance of nonstandard mortgage
loans was $32.6 million, while nonaccrual and delinquent nonstandard mortgage
loans were $16.2 million. We elected to place certain nonstandard mortgage loans
on nonaccrual status at origination of such loans due to their structure. At
December 31, 2008, 42% of the nonaccrual nonstandard mortgage loans were
performing according to their payment terms. We believe nonstandard mortgage
loan accruing and nonaccruing balances peaked in 2008. Only a limited number of
nonstandard mortgage loans have been originated since the second quarter of 2008
and looking forward, the number of additional nonstandard mortgage loan
originations is also expected to be limited.
28
Home
equity lines and loans were $273 million, or 70%, of the real estate mortgage
portfolio. The Bank’s home equity lines and loans were almost entirely generated
within our market area and were originated by our branches. The portfolio has
grown steadily over the past few years as a result of focused and ongoing local
marketing efforts.
As shown
in the table below, the home equity line utilization percentage has averaged
approximately 55% and has been fairly consistent across the year of origination:
|
|
|
Year of Origination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
&
|
|
|
|
|
|
(Dollars in thousands)
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Earlier
|
|
Total
|
|
Home Equity Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
$
|
72,893
|
|
|
$
|
90,443
|
|
|
$
|
95,548
|
|
|
$
|
71,005
|
|
|
$
|
33,209
|
|
|
$
|
66,447
|
|
|
$
|
429,545
|
|
|
Outstanding Balance
|
|
|
40,050
|
|
|
|
51,549
|
|
|
|
55,589
|
|
|
|
43,377
|
|
|
|
17,872
|
|
|
|
31,020
|
|
|
|
239,457
|
|
|
|
|
Utilization
|
|
|
54.9
|
%
|
|
|
57.0
|
%
|
|
|
58.2
|
%
|
|
|
61.1
|
%
|
|
|
53.8
|
%
|
|
|
46.7
|
%
|
|
|
55.3
|
%
|
|
|
|
Home Equity Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance
|
|
|
10,732
|
|
|
|
8,727
|
|
|
|
7,358
|
|
|
|
1,628
|
|
|
|
1,229
|
|
|
|
3,852
|
|
|
|
33,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Home Equity
Outstanding
|
|
$
|
50,782
|
|
|
$
|
60,276
|
|
|
$
|
62,947
|
|
|
$
|
45,005
|
|
|
$
|
19,101
|
|
|
$
|
34,872
|
|
|
$
|
272,983
|
|
As indicated in the table below, the average Beacon score for
borrowers in the home equity line and loan portfolios were 763 and 729,
respectively at December 31, 2008. The delinquencies and charge-offs have been
very modest within these portfolios. The original average loan-to-value ratios
of 65% and 64% for the home equity line and loan portfolios, respectively,
reflect that the majority of the originations were done at loan-to-value ratios
of less than 80%. The significant amount of related loans and deposits is a
result of our home equity line and loan portfolios being sourced to relationship
customers through our branch network.
The
following table presents an overview of home equity lines of credit and loans as
of the dates shown:
|
(Dollars in
thousands)
|
|
December 31, 2008
|
|
December 31, 2007
|
|
|
|
Lines
|
|
Loans
|
|
Lines
|
|
Loans
|
|
Total Outstanding Balance
|
|
$
|
239,457
|
|
|
$
|
33,526
|
|
|
$
|
204,813
|
|
|
$
|
31,594
|
|
|
|
|
Average Current Beacon Score
|
|
|
763
|
|
|
|
729
|
|
|
|
753
|
|
|
|
723
|
|
|
|
|
Delinquent % 30 Days or Greater
|
|
|
0.04
|
%
|
|
|
0.22
|
%
|
|
|
0.20
|
%
|
|
|
0.07
|
%
|
|
% Net
Charge-Offs (Recoveries) Year to Date
|
|
|
0.05
|
%
|
|
|
0.28
|
%
|
|
|
0.30
|
%
|
|
|
-0.05
|
%
|
|
|
|
% 1st Lien Position
|
|
|
34
|
%
|
|
|
39
|
%
|
|
|
34
|
%
|
|
|
41
|
%
|
|
% 2nd Lien
Position
|
|
|
66
|
%
|
|
|
61
|
%
|
|
|
66
|
%
|
|
|
59
|
%
|
|
|
|
Overall Original Loan-to-Value
|
|
|
65
|
%
|
|
|
64
|
%
|
|
|
63
|
%
|
|
|
63
|
%
|
|
|
|
Original Loan-to-Value < 80%
|
|
|
75
|
%
|
|
|
66
|
%
|
|
|
77
|
%
|
|
|
69
|
%
|
|
Original
Loan-to-Value > 80, < 90%
|
|
|
24
|
%
|
|
|
28
|
%
|
|
|
22
|
%
|
|
|
24
|
%
|
|
Original Loan-to-Value > 90, < 100%
|
|
|
1
|
%
|
|
|
6
|
%
|
|
|
1
|
%
|
|
|
7
|
%
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
Total Related Loans and Deposit Dollars
(1)
|
|
$
|
367,956
|
|
|
$
|
20,857
|
|
|
$
|
365,718
|
|
|
$
|
33,739
|
|
|
(1)
|
|
These amounts represent loans other than home equity and
deposit balances associated with our customers who have a home equity line
or loan.
|
29
The
following table shows home equity lines of credit and loans by market areas and
indicates a geographic distribution of balances representative of our branch
presence in these markets:
|
(Dollars in
thousands)
|
|
December 31,
|
|
Percent of
|
|
December 31,
|
|
Percent of
|
|
Region
|
|
2008
|
|
total
|
|
2007
|
|
total
|
|
Portland, Oregon / Vancouver, Washington
|
|
$
|
114,148
|
|
42
|
%
|
|
$
|
97,322
|
|
41
|
%
|
|
Willamette
Valley (Salem, Eugene)
|
|
|
85,293
|
|
31
|
%
|
|
|
77,330
|
|
33
|
%
|
|
Western Washington (Olympia, Seattle)
|
|
|
36,499
|
|
14
|
%
|
|
|
31,701
|
|
13
|
%
|
|
Oregon Coast
(Newport, Lincoln City)
|
|
|
25,032
|
|
9
|
%
|
|
|
21,191
|
|
9
|
%
|
|
Central Oregon (Bend, Redmond)
|
|
|
8,553
|
|
3
|
%
|
|
|
6,593
|
|
3
|
%
|
|
Other
|
|
|
3,458
|
|
1
|
%
|
|
|
2,270
|
|
1
|
%
|
|
Total home equity loans and
lines of credit
|
|
$
|
272,983
|
|
100
|
%
|
|
$
|
236,407
|
|
100
|
%
|
The majority of our home equity
lines and loans are associated with homes in the Portland/Vancouver and
Willamette Valley markets.
Commercial Real Estate.
The composition of commercial real
estate loan types based on collateral is as follows:
|
(Dollars in
thousands)
|
|
December 31, 2008
|
|
December 31, 2007
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Office Buildings
|
|
$
|
195,000
|
|
22.1
|
%
|
|
$
|
179,000
|
|
22.5
|
%
|
|
Retail
Facilities
|
|
|
118,100
|
|
13.4
|
%
|
|
|
110,100
|
|
13.8
|
%
|
|
Commercial/Agricultural
|
|
|
65,200
|
|
7.4
|
%
|
|
|
54,400
|
|
6.8
|
%
|
|
Medical
Offices
|
|
|
62,100
|
|
7.1
|
%
|
|
|
51,400
|
|
6.5
|
%
|
|
Multi-Family - 5+ Residential
|
|
|
59,400
|
|
6.7
|
%
|
|
|
61,600
|
|
7.7
|
%
|
|
Industrial parks
and related
|
|
|
58,500
|
|
6.6
|
%
|
|
|
48,800
|
|
6.1
|
%
|
|
Manufacturing Plants
|
|
|
42,100
|
|
4.8
|
%
|
|
|
39,200
|
|
4.9
|
%
|
|
Hotels/Motels
|
|
|
36,500
|
|
4.1
|
%
|
|
|
42,100
|
|
5.3
|
%
|
|
Land Development and Raw Land
|
|
|
31,600
|
|
3.6
|
%
|
|
|
25,000
|
|
3.1
|
%
|
|
Mini
Storage
|
|
|
27,700
|
|
3.2
|
%
|
|
|
17,000
|
|
2.1
|
%
|
|
Assisted Living
|
|
|
20,300
|
|
2.3
|
%
|
|
|
12,400
|
|
1.6
|
%
|
|
Food
Establishments
|
|
|
18,900
|
|
2.1
|
%
|
|
|
18,300
|
|
2.3
|
%
|
|
Other
|
|
|
146,700
|
|
16.6
|
%
|
|
|
137,300
|
|
17.3
|
%
|
|
Total commercial
real estate loans
|
|
$
|
882,100
|
|
100.0
|
%
|
|
$
|
796,600
|
|
100.0
|
%
|
The
commercial real estate portfolio increased $85.5 million from December 31, 2007
to December 31, 2008. The 11% growth during 2008, or about twice the average
annual growth from 2001 through 2007, reflected a material decline in the
prepayment volume as well as improved pricing and transaction terms as
competition from secondary market participations decreased considerably in 2008.
At year end 2008, office buildings and retail facilities accounted for 36% of
the collateral securing the commercial real estate portfolio, constant with year
end 2007. We believe Bancorp’s underwriting of commercial real estate loans is
adequate with loan to value ratios at origination generally not exceeding 75%
and debt service coverage ratios generally at 120% or better.
The composition of the commercial
real estate loan portfolio by occupancy type is as follows:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Owner occupied
|
|
$
|
416,817
|
|
47
|
%
|
|
$
|
382,387
|
|
48
|
%
|
|
$
|
34,430
|
|
9
|
%
|
|
Non-owner
occupied
|
|
|
465,275
|
|
53
|
%
|
|
|
414,235
|
|
52
|
%
|
|
|
51,040
|
|
12
|
%
|
|
Total commercial real estate
loans
|
|
$
|
882,092
|
|
100
|
%
|
|
$
|
796,622
|
|
100
|
%
|
|
$
|
85,470
|
|
11
|
%
|
The owner
occupied commercial real estate and non-owner occupied segments expanded fairly
evenly in 2008. We believe the commercial real estate portfolio to be a
relatively mature portfolio with an average loan to value for the non-owner
occupied segment at approximately 50%. Due to the weak economic conditions we
anticipate less growth in the commercial real estate loan portfolio, and
particularly, in the non-owner occupied segment in 2009.
30
Credit Management
.
Credit
risk is inherent in our lending activities. We manage the general risks inherent
in the loan portfolio by following loan policies and underwriting practices
designed to result in prudent lending activities. In addition, we attempt to
manage our risk through our credit administration and credit review functions
that are designed to help confirm our credit standards are being followed.
Through the credit review function we monitor credit related policies and
practices on a post approval basis. Significant findings and periodic reports
are communicated to the chief credit officer and chief executive officer and, in
certain cases, to the Loan, Investment, and Asset Liability Committee, which is
made up of certain directors. Credit risk in the loan portfolio can be amplified
by loan concentrations. We manage our concentration risk on an ongoing basis by
establishing a maximum amount of credit that may be extended to any one borrower
and by employing concentration limits that regulate exposure levels by portfolio
segment.
Our
residential construction portfolio, consisting of developers and builders, is a
portfolio we consider to have higher risk. The current downturn in residential
real estate has slowed land, lot and home sales within our markets and has
resulted in lengthening the marketing period for completed homes and has
negatively affected borrower liquidity and collateral values. During 2008 we
took steps to reduce our exposure to residential construction, including
establishing new targets to lower our concentration levels in loans of this
type. We also expect the downturn in housing to continue to increase the risk
profile of related commercial borrowers, particularly those that are involved in
commercial activities that support the supply chain of products and services
used by the housing industry. Accordingly, we are monitoring the financial
condition of existing borrowers within this commercial loan segment and are
selectively managing the level of loan exposure downward. An important component
of managing our residential construction portfolio involves stress testing, at
both a portfolio and individual borrower level. Our stress test for individual
residential construction borrowers focuses on examining project performance
relative to cash flow and collateral value under a range of assumptions that
include interest rates, absorption, unit sales prices, and capitalization rates.
This level of risk monitoring assists the Bank to timely identify potential
problem loans and develop action plans, which may include requiring borrowers to
replenish interest reserves, decrease construction draws, or transfer the
borrowing relationship to our special asset team for closer
monitoring.
Current
economic conditions are the most challenging the banking industry has faced in
many years, and we expect economic pressures to continue during 2009 and
beyond. Consequently, we are tightly focused on monitoring and managing
credit risk across all of our loan portfolios. As part of our ongoing lending
process, internal risk ratings are assigned to each commercial, commercial real
estate and real estate construction loan before the funds are advanced to the
customer. Credit risk ratings are based on our assessment of the borrower’s
credit worthiness and the quality of our collateral position at the time a
particular loan is made. Thereafter, credit risk ratings are evaluated on an
ongoing basis focusing on our interpretation of relevant risk factors known to
us at the time of each evaluation. Large credit relationships have their credit
risk rating reviewed at least annually, and given current economic conditions,
risk rating evaluations may occur more frequently. Our relationship managers
play a critical element in this process by evaluating the ongoing financial
condition of each borrower in their respective portfolio of loans. These
activities include, but are not limited to, maintaining open communication
channels with borrowers, analyzing periodic financial statements and cash flow
projections, evaluating collateral, monitoring covenant compliance, and
evaluating the financial capacity of guarantors. Collectively, these activities
represent an ongoing process which results in an assessment of credit risk
associated with each commercial, commercial real estate, and real estate
construction loan consistent with our internal risk rating guidelines. Our risk
rating process is a central component in estimating the required allowance for
credit losses, as discussed in the Allowance for Credit Losses section which
follows. Credit files are also examined periodically on a sample test basis by
our credit review department and internal auditors, as well as by regulatory
examiners.
Although
a risk of nonpayment exists with respect to all loans, certain specific types of
risks are associated with different types of loans. The expected source of
repayment of Bancorp’s loans is generally the cash flow of a particular project,
income from the borrower’s business, proceeds from the sale of real property,
proceeds of refinancing, or personal income. Real estate is frequently a
material component of collateral for our loans. Risks associated with loans
secured by real estate include the risks of decreasing land and property values,
material increases in interest rates, deterioration in local economic
conditions, changes in tax policies, and tightening credit or refinancing
markets. A concentration of loans within any one market area may increase these
risks. For more information on this topic, see “Risk Factors” in Item 1A of this
report above.
31
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
nonaccrual loans by category and OREO for the periods presented:
|
|
|
December 31,
|
|
(Dollars in
thousands)
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Commercial
|
|
$
|
6,250
|
|
|
$
|
2,401
|
|
|
$
|
385
|
|
|
$
|
625
|
|
|
$
|
436
|
|
|
Real estate
construction
|
|
|
93,634
|
|
|
|
22,121
|
|
|
|
567
|
|
|
|
-
|
|
|
|
-
|
|
|
Real estate mortgage
|
|
|
24,555
|
|
|
|
552
|
|
|
|
-
|
|
|
|
228
|
|
|
|
-
|
|
|
Commercial real
estate
|
|
|
3,145
|
|
|
|
1,353
|
|
|
|
516
|
|
|
|
231
|
|
|
|
1,367
|
|
|
Installment and other consumer
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
Total loans on nonaccrual
status
|
|
|
127,590
|
|
|
|
26,427
|
|
|
|
1,468
|
|
|
|
1,088
|
|
|
|
1,803
|
|
|
Loans past due 90 days or more but not on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonaccrual status
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other real
estate owned
|
|
|
70,110
|
|
|
|
3,255
|
|
|
|
-
|
|
|
|
-
|
|
|
|
384
|
|
|
Total nonperforming
assets
|
|
$
|
197,700
|
|
|
$
|
29,682
|
|
|
$
|
1,468
|
|
|
$
|
1,088
|
|
|
$
|
2,187
|
|
|
Percentage of
nonperforming assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total assets
|
|
|
7.86
|
%
|
|
|
1.12
|
%
|
|
|
0.06
|
%
|
|
|
0.05
|
%
|
|
|
0.12
|
%
|
|
|
|
Total assets
|
|
$
|
2,516,140
|
|
|
$
|
2,646,614
|
|
|
$
|
2,465,372
|
|
|
$
|
1,997,138
|
|
|
$
|
1,790,919
|
|
At
December 31, 2008, total nonperforming assets were $197.7 million, or 7.86% of
total assets, compared to $29.7 million, or 1.12% of total assets, at December
31, 2007. Nonaccrual loans increased to $127.6 million at December 31, 2008,
from $26.4 million at December 31, 2007. For additional information, see
“Nonperforming Assets and Delinquencies – Two-Step Loans” in Item 7 of this
report below.
During
our normal loan review procedures, a loan is considered to be impaired when it
is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans are measured based on
the present value of expected future cash flows, discounted at the loan’s
effective interest rate or, as a practical expedient, at the loan’s observable
market price or the fair market value of the collateral less selling costs if
the loan is collateral dependent. Loans that are measured at lower of cost or
fair value and certain large groups of smaller balance homogeneous loans
collectively measured for impairment, are excluded from impairment measurement.
Impaired loans are charged to the allowance for loan losses when management
believes, after considering economic, market, and business conditions,
collection efforts, collateral position, and other factors deemed relevant, that
the borrower’s financial condition is such that collection of principal and
interest is not probable.
At
December 31, 2008, and 2007, Bancorp’s recorded investment in certain loans that
were considered to be impaired was $161.9 million and $33.2 million,
respectively. At December 31, 2007, $21.7 million of these impaired loans had a
specific related valuation allowance of $3.6 million while $11.5 million did not
require a specific valuation allowance. At December 31, 2008, there were no
specific valuation allowances for impaired loans due to the Company’s revised
loan policy on accounting for the recognition of impairment on real estate
collateral dependent loans in the first quarter ended March 31, 2008. The
Company now charges off the amount of impairment at the time of impairment,
rather than placing the impaired loan amount in a specific reserve within the
allowance for loan losses. The average recorded investment in impaired loans for
the years ended December 31, 2008, 2007, and 2006 was $128.6 million, $15.5
million and $3.8 million, respectively. For the years ended December 31, 2008,
2007, and 2006, interest income recognized on impaired loans totaled $1,195,000,
$23,000, and $220,000, respectively, all of which was recognized on a cash
basis. Interest income on loans is accrued daily on the principal balance
outstanding. Generally, loans are placed on nonaccrual status and no interest is
accrued when factors indicate collection of interest or principal in accordance
with the contractual terms is doubtful or when the principal or interest payment
becomes 90 days past due. For such loans, previously accrued but uncollected
interest is reversed and charged against current earnings and additional income
is only recognized to the extent payments are subsequently received and the loan
comes out of nonaccrual status. Interest income foregone on nonaccrual loans was
approximately $13.6 million, $1.4 million, and $.1 million in 2008, 2007, and
2006, respectively.
32
The following table presents
activity in the total OREO portfolio for the periods shown:
|
|
|
2008
|
|
|
|
|
2007
|
|
(Dollars in
thousands)
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Beginning balance January 1
|
|
$
|
3,255
|
|
|
15
|
|
|
$
|
-
|
|
|
1
|
|
|
Additions to OREO
|
|
|
2,461
|
|
|
10
|
|
|
|
340
|
|
|
1
|
|
|
Capitalized
improvements
|
|
|
246
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Valuation
adjustments
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Disposition of OREO
|
|
|
(274
|
)
|
|
(1
|
)
|
|
|
(340
|
)
|
|
(1
|
)
|
|
Ending balance
March 31
|
|
$
|
5,688
|
|
|
24
|
|
|
$
|
-
|
|
|
1
|
|
|
|
|
Additions to OREO
|
|
|
25,197
|
|
|
94
|
|
|
|
-
|
|
|
-
|
|
|
Capitalized
improvements
|
|
|
193
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Valuation
adjustments
|
|
|
(245
|
)
|
|
|
|
|
|
-
|
|
|
|
|
|
Disposition of OREO
|
|
|
(2,941
|
)
|
|
(10
|
)
|
|
|
-
|
|
|
-
|
|
|
Ending balance June 30
|
|
$
|
27,892
|
|
|
108
|
|
|
$
|
-
|
|
|
1
|
|
|
|
|
Additions to OREO
|
|
|
26,786
|
|
|
103
|
|
|
|
1,374
|
|
|
6
|
|
|
Capitalized
improvements
|
|
|
179
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Valuation
adjustments
|
|
|
(1,118
|
)
|
|
|
|
|
|
-
|
|
|
|
|
|
Disposition of OREO
|
|
|
(5,618
|
)
|
|
(22
|
)
|
|
|
(191
|
)
|
|
(1
|
)
|
|
Ending balance September 30
|
|
$
|
48,121
|
|
|
189
|
|
|
$
|
1,183
|
|
|
6
|
|
|
|
|
Additions to OREO
|
|
|
33,355
|
|
|
129
|
|
|
|
2,015
|
|
|
9
|
|
|
Capitalized
improvements
|
|
|
711
|
|
|
|
|
|
|
57
|
|
|
|
|
|
Valuation
adjustments
|
|
|
(3,422
|
)
|
|
|
|
|
|
-
|
|
|
|
|
|
Disposition of OREO
|
|
|
(8,655
|
)
|
|
(30
|
)
|
|
|
-
|
|
|
|
|
|
Ending balance December
31
|
|
$
|
70,110
|
|
|
288
|
|
|
$
|
3,255
|
|
|
15
|
|
OREO is
real property of which the Bank has taken substantial possession or that has
been deeded to the Bank through a deed-in-lieu of foreclosure, non-judicial
foreclosure, judicial foreclosure or similar process in partial or full
satisfaction of a loan or loans. The Company had 288 OREO properties at December
31, 2008, with a total net book value of $70.1 million. All but one of these
properties was associated with residential uses. OREO is initially recorded at
the lower of the carrying amount of the loan or fair value of the property less
estimated costs to sell. This amount becomes the property’s new basis.
Management considers third party appraisals as well as independent fair market
value assessments from realtors or persons involved in selling OREO in
determining the fair value of particular properties. Accordingly, the valuation
of OREO is subject to significant external and internal judgment. Any
differences between management’s assessment of fair value, less estimated cost
to sell, and the carrying value of the loan at the date a particular property is
transferred into OREO are charged to the allowance for credit losses.
Thereafter, decreases in the value of OREO are considered valuation adjustments
and trigger a corresponding charge to line item “other real estate owned sales
and valuation adjustments” within total noninterest income of the consolidated
statements of income.
Management also periodically reviews OREO to determine whether the
property continues to be carried at the lower of its recorded book value or fair
value, net of estimated costs to sell. Any further OREO valuation adjustments or
subsequent gains or losses on the final disposition of OREO are charged to other
noninterest income. Expenses from the maintenance and operations of OREO are
included in other noninterest expense in the statements of income (loss).
33
Delinquencies.
Bancorp also monitors
delinquencies, defined as balances 30-89 days past due, not in nonaccrual
status, as an important indicator for future nonperforming assets. Total
delinquencies were .39% of total loans at December 31, 2008, down from 2.05% at
December 31, 2007. Delinquencies of real estate construction loans decreased
from $36.9 million at year end 2007 to $1.9 million at year end 2008, as
previously delinquent loans moved to nonaccrual status and OREO.
The following table summarizes total
delinquent loan balances by type of loan for the periods shown:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
2008
|
|
%
of
|
|
2007
|
|
|
%
of
|
|
2006
|
|
|
%
of
|
|
|
|
Amount
|
|
category
|
|
Amount
|
|
|
category
|
|
Amount
|
|
|
category
|
|
Commercial
|
|
$
|
2,814
|
|
|
0.58
|
%
|
|
$
|
6,086
|
|
|
1.21
|
%
|
|
$
|
299
|
|
|
0.06
|
%
|
|
Real estate
construction
|
|
|
1,940
|
|
|
0.68
|
%
|
|
|
36,941
|
|
|
7.13
|
%
|
|
|
12,223
|
|
|
3.69
|
%
|
|
Real estate mortgage
|
|
|
1,934
|
|
|
0.49
|
%
|
|
|
531
|
|
|
0.16
|
%
|
|
|
2,069
|
|
|
0.53
|
%
|
|
Commercial real
estate
|
|
|
1,324
|
|
|
0.15
|
%
|
|
|
792
|
|
|
0.10
|
%
|
|
|
306
|
|
|
0.04
|
%
|
|
Installment and other consumer
|
|
|
80
|
|
|
0.36
|
%
|
|
|
134
|
|
|
0.58
|
%
|
|
|
111
|
|
|
0.49
|
%
|
|
Total loans
30-89 days past due,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
not in nonaccrual status
|
|
$
|
8,092
|
|
|
|
|
|
$
|
44,484
|
|
|
|
|
|
$
|
15,008
|
|
|
|
|
|
|
|
Delinquent loans to total loans
|
|
|
0.39
|
%
|
|
|
|
|
|
2.05
|
%
|
|
|
|
|
|
0.71
|
%
|
|
|
|
For further discussion, see
“Nonperforming Assets and Delinquencies – Other Than Two-Step Loans” and
“Nonperforming Assets and Delinquencies – Two-Step Loans” in Item 7 of this
report below.
34
Allowance for Credit Losses and Net
Loan Charge-offs
Allowance for Credit Losses.
An
allowance for credit losses has been established based on management’s best
estimate, as of the balance sheet date, of probable losses inherent in the loan
portfolio. The actual losses may vary significantly from the estimated amounts.
For more information on this topic, see “Critical Accounting Policies” in Item 7
of this report above. The allowance for credit losses is comprised of two
components: the allowance for loan losses, which is the sum of the specific,
formula and unallocated allowance, and the reserve for unfunded commitments. Our
methodology for determining the allowance for credit losses consists of several
key elements, which include:
-
Specific Allowances.
A specific allowance
was generally established when management had identified unique or particular
risks that were related to a specific loan that demonstrated risk
characteristics consistent with impairment.
Specific allowances were also established when management estimated the
amount of an impairment on a loan, typically on a non real estate
collateralized loan. The Company revised its loan policy on accounting for the
recognition of impairment on real estate collateral dependent loans in the
first quarter ended March 31, 2008. Impairments on real estate collateralized
loans are now charged off immediately to the allowance for loan losses.
Applying this policy change has accelerated the timing of charge-offs
associated with real estate collateral dependent impaired loans. In addition,
known impairments on non-real estate secured loans are charged off immediately
rather than recording a specific reserve in the allowance for loan losses at
the time of impairment. Specific allowances may also be established to address
the unique risks associated with a group of loans or particular type of credit
exposure, for example, potential losses associated with
overdrafts.
-
Formula Allowance.
The formula allowance is
calculated by applying loss factors to individual loans based on the
assignment of risk ratings, or through the assignment of loss factors to
homogenous pools of loans. Changes in risk grades of both performing and
nonperforming loans affect the amount of the formula allowance. Loss factors
are based on our historical loss experience and such other data as management
believes to be pertinent, and may be adjusted for significant factors that, in
management’s judgment, affect the collectibility of the portfolio as of the
evaluation date.
-
Unallocated Allowance.
The unallocated loan
loss allowance represents an amount for imprecision or uncertainty that is
inherent in estimates used to determine the allowance, which may change from
period to period. This portion of the allowance for loan losses currently
applies to other than two-step loans, and is the result of our judgment about
risks inherent in the portfolio, economic uncertainties, historical loss
experience relative to current trends, and other subjective factors. Other
considerations include: regional economic and business conditions that impact
important segments of our portfolio, loan growth rates, depth and skill of
lending staff, the interest rate environment, and bank regulatory examination
results and findings of our internal credit examiners. Prior to September 30,
2007, the unallocated portion of our allowance also covered expected losses
associated with unfunded commitments.
-
Reserve for Unfunded Commitments.
A reserve
for unfunded commitments is maintained at a level that, in the opinion of
management, is adequate to absorb probable losses associated with commitments
to lend funds under existing agreements, for example, the Bank’s commitment to
fund advances under lines of credit. The reserve amount for unfunded
commitments is determined based on our methodologies described above with
respect to the formula allowance. As our unfunded commitments decrease due to
the transition to a funded loan, the corresponding reserve for unfunded
commitments will decrease. The decrease to the provision for credit losses
associated with decreases in the balance of unfunded commitments will
typically be offset by an increase in the allowance for loan losses related to
an additional amount funded. For more information on this topic, see “Critical
Accounting Policies” in Item 7 of this report above. The reserve for unfunded
commitments was $1.0 million at December 31, 2008, due mainly to the estimated
required allowance for unfunded commitments associated with the two-step
portfolio. For more information on this topic, see “Allowance for Credit
Losses - Two-Step Loans” in Item 7 of this report below.
At
December 31, 2008, the allowance for credit losses was $29.9 million, consisting
of no specific allowance, a $27.0 million formula allowance, a $1.9 million
unallocated allowance and a $1.0 million reserve for unfunded commitments. At
December 31, 2007, the allowance for credit losses was $54.9 million, consisting
of a $3.6 million specific allowance, $41.4 million formula allowance, a $1.9
million unallocated allowance and an $8.0 million reserve for unfunded
commitments. The decrease in the total allowance during 2008 was largely due to
decreases in the reserve for credit losses associated with two-step loans, which
are no longer being originated, for which a $30.1 million reserve for credit
losses was in place at year end 2007. Other elements which contributed to the
reduction in total allowance for loan losses were charge-offs, reduced balances
of unfunded commitments and fewer delinquent and nonaccrual loans in the
two-step portfolio. For more information on this topic, see “Allowance for
Credit Losses - Two-Step Loans” in Item 7 of this report below.
35
Our
allowance incorporates the results of measuring impaired loans as provided in
Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by
Creditors for Impairment of a Loan,” and SFAS No. 118, “Accounting by Creditors
for Impairment of a Loan – Income Recognition and Disclosures.” These accounting
standards prescribe the measurement, income recognition and guidelines
concerning impaired loans. In addition, net overdraft losses are included in the
calculation of the allowance for credit losses per the guidance provided by
regulatory authorities in the “Joint Guidance on Overdraft Protection Programs.”
Changes in the total allowance for
credit losses for full years ended December 31, 2008 through December 31, 2004,
are presented in the following table:
|
|
|
December 31,
|
|
(Dollars in
thousands)
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Loans outstanding at end of period
|
|
$
|
2,064,796
|
|
|
$
|
2,172,669
|
|
|
$
|
1,947,690
|
|
|
$
|
1,554,454
|
|
|
$
|
1,427,994
|
|
|
Average loans
outstanding during the period
|
|
$
|
2,146,870
|
|
|
$
|
2,094,977
|
|
|
$
|
1,745,777
|
|
|
$
|
1,479,933
|
|
|
$
|
1,301,447
|
|
|
|
|
Allowance for credit losses, beginning of period
|
|
$
|
54,903
|
|
|
$
|
23,017
|
|
|
$
|
20,469
|
|
|
$
|
18,971
|
|
|
$
|
18,131
|
|
|
Allowance for
loan losses, from acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
887
|
|
|
|
-
|
|
|
|
-
|
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(6,464
|
)
|
|
|
(3,798
|
)
|
|
|
(831
|
)
|
|
|
(634
|
)
|
|
|
(1,149
|
)
|
|
Real
estate
|
|
|
(59,932
|
)
|
|
|
(2,611
|
)
|
|
|
(48
|
)
|
|
|
(33
|
)
|
|
|
(527
|
)
|
|
Installment
and consumer
|
|
|
(531
|
)
|
|
|
(254
|
)
|
|
|
(130
|
)
|
|
|
(507
|
)
|
|
|
(698
|
)
|
|
Overdraft
|
|
|
(1,328
|
)
|
|
|
(1,050
|
)
|
|
|
(912
|
)
|
|
|
(450
|
)
|
|
|
-
|
|
|
Total loans charged
off
|
|
|
(68,255
|
)
|
|
|
(7,713
|
)
|
|
|
(1,921
|
)
|
|
|
(1,624
|
)
|
|
|
(2,374
|
)
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
203
|
|
|
|
269
|
|
|
|
501
|
|
|
|
478
|
|
|
|
438
|
|
|
Real estate
|
|
|
2,409
|
|
|
|
42
|
|
|
|
40
|
|
|
|
108
|
|
|
|
340
|
|
|
Installment and
consumer
|
|
|
78
|
|
|
|
112
|
|
|
|
75
|
|
|
|
279
|
|
|
|
176
|
|
|
Overdraft
|
|
|
229
|
|
|
|
220
|
|
|
|
233
|
|
|
|
82
|
|
|
|
-
|
|
|
Total recoveries
|
|
|
2,919
|
|
|
|
643
|
|
|
|
849
|
|
|
|
947
|
|
|
|
954
|
|
|
Net loans charged off
|
|
|
(65,336
|
)
|
|
|
(7,070
|
)
|
|
|
(1,072
|
)
|
|
|
(677
|
)
|
|
|
(1,420
|
)
|
|
Provision for
credit losses
|
|
|
40,367
|
|
|
|
38,956
|
|
|
|
2,733
|
|
|
|
2,175
|
|
|
|
2,260
|
|
|
Allowance for credit losses, end
of period
|
|
$
|
29,934
|
|
|
$
|
54,903
|
|
|
$
|
23,017
|
|
|
$
|
20,469
|
|
|
$
|
18,971
|
|
|
|
|
Components of allowance for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|
$
|
28,920
|
|
|
$
|
46,917
|
|
|
$
|
23,017
|
|
|
$
|
20,469
|
|
|
$
|
18,971
|
|
|
Reserve for unfunded
commitments
|
|
|
1,014
|
|
|
|
7,986
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total allowance for credit
losses
|
|
$
|
29,934
|
|
|
$
|
54,903
|
|
|
$
|
23,017
|
|
|
$
|
20,469
|
|
|
$
|
18,971
|
|
|
|
|
Ratio of net loans charged off to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans outstanding
|
|
|
3.04
|
%
|
|
|
0.34
|
%
|
|
|
0.06
|
%
|
|
|
0.05
|
%
|
|
|
0.11
|
%
|
|
Ratio of
allowance for loan losses to end of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period loans
|
|
|
1.40
|
%
|
|
|
2.16
|
%
|
|
|
1.18
|
%
|
|
|
1.32
|
%
|
|
|
1.33
|
%
|
|
Ratio of allowance for credit losses to end of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period loans
|
|
|
1.45
|
%
|
|
|
2.53
|
%
|
|
|
1.18
|
%
|
|
|
1.32
|
%
|
|
|
1.33
|
%
|
At
December 31, 2008, our allowance for credit losses was 1.45% of total loans,
compared with an allowance for credit losses at December 31, 2007, of 2.53% of
total loans, while our total allowance for loan losses was $28.9 million, or
1.40% of total loans at year end 2008 compared to $46.9 million, or 2.16% of
total loans at year end 2007.
36
The
following table presents the composition by loan category of the Company’s total
allowance for loan losses:
|
|
|
December 31,
|
|
% of
loans in
|
|
December 31,
|
|
% of
loans in
|
|
(Dollars in
thousands)
|
|
2008
|
|
each
loan category
|
|
2007
|
|
each
loan category
|
|
|
|
Amount
|
|
to total loans
|
|
Amount
|
|
to total loans
|
|
Commercial
|
|
$
|
6,563
|
|
23.4
|
%
|
|
$
|
8,416
|
|
23.2
|
%
|
|
Real estate
construction
|
|
|
7,654
|
|
13.8
|
%
|
|
|
28,123
|
|
23.8
|
%
|
|
Real estate mortgage
|
|
|
4,903
|
|
19.0
|
%
|
|
|
1,645
|
|
15.2
|
%
|
|
Commercial real
estate
|
|
|
6,539
|
|
42.7
|
%
|
|
|
5,808
|
|
36.7
|
%
|
|
Installment and other consumer
|
|
|
1,318
|
|
1.1
|
%
|
|
|
1,044
|
|
1.1
|
%
|
|
Unallocated
|
|
|
1,943
|
|
-
|
|
|
|
1,881
|
|
-
|
|
|
Total allowance for loan
losses
|
|
$
|
28,920
|
|
|
|
|
$
|
46,917
|
|
|
|
Overall,
we believe that the allowance for credit losses is adequate to absorb losses in
the loan portfolio at December 31, 2008. The process for determining the
adequacy of the allowance for credit losses is critical to our financial
results. It requires difficult, subjective and complex judgments as a result of
the need to make estimates about the effect of matters that are uncertain.
Therefore, we cannot provide assurance that, in any particular period, we will
not have sizeable credit losses in relation to the amount reserved. We may later
need to significantly adjust the allowance for credit losses considering factors
in existence at such time, including economic, market, or business conditions
and the results of ongoing internal and external examination processes.
Net Loan Charge-offs.
During 2008, total net loan charge-offs were $65.3 million
compared to $7.1 million in 2007. Net loan charge-offs in 2006 were $1.1
million. Net loan charge-offs reflect the realization of net losses in the loan
portfolio that were recognized previously through the provision for credit
losses. The total net loan charge-off to total average loans outstanding was
3.04% for the year ended 2008, up from .34% in 2007 and .06% in 2006. The total
net loan charge-off percentage increased significantly in 2008 as we recognized
loan losses on the two-step loan portfolio. The challenging economic environment
is projected to lead to additional losses in the remainder of the loan portfolio
in 2009. For more information on this topic see “Net Loan Charge-offs – Loans
Other Than Two-Step Loans” and “Net Loan Charge-offs – Two-Step Loans” in Item 7
of this report below.
37
Additional Loan Portfolio Disclosure
We are
providing additional information below regarding nonperforming assets and the
allowance for credit losses that distinguishes loans other than two-step loans
from those in our two-step loan portfolio. Management is providing this
information to aid in the readers understanding of the impact of the two-step
loan portfolio on our entire loan portfolio.
The first
section includes additional information regarding loans in our loan portfolio
other than two-step loans. The second section includes information solely
relating to loans in our two-step loan portfolio. For information regarding our
total loan portfolio, see “Loan Portfolio” in Item 7 of this report above.
Loans Other Than Two-Step
Loans
The
following table shows our total loan portfolio by category, as well as the
breakout of the two-step loan portfolio from our other real estate construction
loans:
|
|
|
Period End Loan Portfolio By
Category
|
|
|
|
December 31,
|
|
% of
total
|
|
December 31,
|
|
% of
total
|
|
Change
|
|
|
|
|
September 30,
|
|
% of
total
|
|
(Dollars in
thousands, unaudited)
|
|
2008
|
|
loans
|
|
2007
|
|
loans
|
|
Amount
|
|
%
|
|
2008
|
|
loans
|
|
Commercial loans
|
|
$
|
482,405
|
|
23.4
|
%
|
|
$
|
504,101
|
|
23.2
|
%
|
|
$
|
(21,696
|
)
|
|
-4.3
|
%
|
|
$
|
498,715
|
|
23.6
|
%
|
|
Commercial real estate
construction
|
|
|
92,414
|
|
4.5
|
%
|
|
|
90,671
|
|
4.2
|
%
|
|
|
1,743
|
|
|
1.9
|
%
|
|
|
88,717
|
|
4.2
|
%
|
|
Residential real estate
construction
|
|
|
192,735
|
|
9.3
|
%
|
|
|
427,317
|
|
19.7
|
%
|
|
|
(234,582
|
)
|
|
-54.9
|
%
|
|
|
242,116
|
|
11.5
|
%
|
|
Total real
estate construction loans
|
|
|
285,149
|
|
13.8
|
%
|
|
|
517,988
|
|
23.8
|
%
|
|
|
(232,839
|
)
|
|
-45.0
|
%
|
|
|
330,833
|
|
15.7
|
%
|
|
Standard mortgages
|
|
|
87,628
|
|
4.2
|
%
|
|
|
86,901
|
|
4.0
|
%
|
|
|
727
|
|
|
0.8
|
%
|
|
|
89,348
|
|
4.2
|
%
|
|
Nonstandard
mortgages
|
|
|
32,597
|
|
1.6
|
%
|
|
|
7,495
|
|
0.3
|
%
|
|
|
25,102
|
|
|
334.9
|
%
|
|
|
33,820
|
|
1.6
|
%
|
|
Home equity
|
|
|
272,983
|
|
13.2
|
%
|
|
|
236,407
|
|
10.9
|
%
|
|
|
36,576
|
|
|
15.5
|
%
|
|
|
266,385
|
|
12.6
|
%
|
|
Total real
estate mortgage
|
|
|
393,208
|
|
19.0
|
%
|
|
|
330,803
|
|
15.2
|
%
|
|
|
62,405
|
|
|
18.9
|
%
|
|
|
389,553
|
|
18.5
|
%
|
|
Commercial real estate loans
|
|
|
882,092
|
|
42.7
|
%
|
|
|
796,622
|
|
36.7
|
%
|
|
|
85,470
|
|
|
10.7
|
%
|
|
|
867,902
|
|
41.1
|
%
|
|
Installment and
other consumer loans
|
|
|
21,942
|
|
1.1
|
%
|
|
|
23,155
|
|
1.1
|
%
|
|
|
(1,213
|
)
|
|
-5.2
|
%
|
|
|
22,514
|
|
1.1
|
%
|
|
Total loans
|
|
$
|
2,064,796
|
|
100
|
%
|
|
$
|
2,172,669
|
|
100
|
%
|
|
$
|
(107,873
|
)
|
|
-5.0
|
%
|
|
$
|
2,109,517
|
|
100
|
%
|
|
|
|
Two-step residential construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans
|
|
$
|
53,084
|
|
2.6
|
%
|
|
$
|
262,952
|
|
12.1
|
%
|
|
$
|
(209,868
|
)
|
|
-79.8
|
%
|
|
$
|
97,894
|
|
4.6
|
%
|
|
Total loans
other than two-step loans
|
|
|
2,011,712
|
|
97.4
|
%
|
|
|
1,909,717
|
|
87.9
|
%
|
|
|
101,995
|
|
|
5.3
|
%
|
|
|
2,011,623
|
|
95.4
|
%
|
|
Total loans
|
|
$
|
2,064,796
|
|
100.0
|
%
|
|
$
|
2,172,669
|
|
100.0
|
%
|
|
$
|
(107,873
|
)
|
|
-5.0
|
%
|
|
$
|
2,109,517
|
|
100.0
|
%
|
|
|
|
Two-step residential construction loans
|
|
$
|
53,084
|
|
2.6
|
%
|
|
$
|
262,952
|
|
12.1
|
%
|
|
$
|
(209,868
|
)
|
|
-79.8
|
%
|
|
$
|
97,894
|
|
4.6
|
%
|
|
Other than
two-step residential construction loans
|
|
|
139,651
|
|
6.8
|
%
|
|
|
164,365
|
|
7.6
|
%
|
|
|
(24,714
|
)
|
|
-15.0
|
%
|
|
|
144,222
|
|
6.8
|
%
|
|
Total residential real estate
construction
|
|
$
|
192,735
|
|
9.3
|
%
|
|
$
|
427,317
|
|
19.7
|
%
|
|
$
|
(234,582
|
)
|
|
-54.9
|
%
|
|
$
|
242,116
|
|
11.5
|
%
|
As shown above, loans other than
two-step loans were $2.01 billion at year end 2008, up $102 million, or 5%, from
December 31, 2007.
38
Nonperforming Assets and
Delinquencies – Loans and OREO Other Than Two-Step Loans
Nonperforming assets - Loans and OREO Other Than Two-Step Loans.
The following table presents information
about nonperforming assets and delinquencies relating to loans and OREO other
than two-step loans at the dates shown:
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
December 31,
|
|
loan
|
|
December 31,
|
|
loan
|
|
September 30,
|
|
loan
|
|
(Dollars in
thousands, unaudited)
|
|
2008
|
|
category
|
|
2007
|
|
category
|
|
2008
|
|
category
|
|
Loans on nonaccrual status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
6,250
|
|
|
1.3
|
%
|
|
$
|
2,401
|
|
|
0.5
|
%
|
|
$
|
6,650
|
|
|
1.3
|
%
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
construction
|
|
|
2,922
|
|
|
3.2
|
%
|
|
|
-
|
|
|
0.0
|
%
|
|
|
-
|
|
|
0.0
|
%
|
|
Residential real estate
construction
|
|
|
40,752
|
|
|
21.1
|
%
|
|
|
1,576
|
|
|
0.4
|
%
|
|
|
21,025
|
|
|
8.7
|
%
|
|
Total real
estate construction
|
|
|
43,674
|
|
|
15.3
|
%
|
|
|
1,576
|
|
|
0.3
|
%
|
|
|
21,025
|
|
|
6.4
|
%
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard mortgage
|
|
|
8,283
|
|
|
9.5
|
%
|
|
|
552
|
|
|
0.6
|
%
|
|
|
6,384
|
|
|
7.1
|
%
|
|
Nonstandard mortgage
|
|
|
15,229
|
|
|
46.7
|
%
|
|
|
-
|
|
|
0.0
|
%
|
|
|
11,834
|
|
|
35.0
|
%
|
|
Home equity
|
|
|
1,043
|
|
|
0.4
|
%
|
|
|
-
|
|
|
0.0
|
%
|
|
|
644
|
|
|
0.2
|
%
|
|
Total real estate mortgage
|
|
|
24,555
|
|
|
6.2
|
%
|
|
|
552
|
|
|
0.2
|
%
|
|
|
18,862
|
|
|
4.8
|
%
|
|
Commercial real
estate
|
|
|
3,145
|
|
|
0.4
|
%
|
|
|
1,353
|
|
|
0.2
|
%
|
|
|
5,636
|
|
|
0.6
|
%
|
|
Installment and consumer
|
|
|
6
|
|
|
0.0
|
%
|
|
|
-
|
|
|
0.0
|
%
|
|
|
14
|
|
|
0.1
|
%
|
|
Total nonaccrual
loans
|
|
|
77,630
|
|
|
3.8
|
%
|
|
|
5,882
|
|
|
0.3
|
%
|
|
|
52,187
|
|
|
2.5
|
%
|
|
90 days past due not on nonaccrual
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total non-performing
loans
|
|
|
77,630
|
|
|
3.8
|
%
|
|
|
5,882
|
|
|
0.3
|
%
|
|
|
52,187
|
|
|
2.5
|
%
|
|
|
|
Other real estate owned
|
|
|
10,088
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
3,446
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
87,718
|
|
|
|
|
|
$
|
5,882
|
|
|
|
|
|
$
|
55,633
|
|
|
|
|
|
|
|
Delinquent non two-step loans 30-89 days past due, not in
nonaccrual status
|
|
$
|
6,850
|
|
|
|
|
|
$
|
7,706
|
|
|
|
|
|
$
|
10,919
|
|
|
|
|
|
|
|
Nonperforming non two-step loans to total non two-step
loans
|
|
|
3.86
|
%
|
|
|
|
|
|
0.31
|
%
|
|
|
|
|
|
2.59
|
%
|
|
|
|
|
Nonperforming
non two-step assets to total assets
|
|
|
3.49
|
%
|
|
|
|
|
|
0.22
|
%
|
|
|
|
|
|
2.16
|
%
|
|
|
|
|
Delinquent non two-step loans to total non two-step loans
|
|
|
0.34
|
%
|
|
|
|
|
|
0.40
|
%
|
|
|
|
|
|
0.54
|
%
|
|
|
|
Nonperforming assets related to
loans other than two-step loans increased from $5.9 million at year end 2007 to
$87.7 million, or 3.49% of total assets, at December 31, 2008. Over 75% of the
increase in total nonaccrual loans in 2008 was attributable to residential
construction and residential nonstandard mortgage loan categories. At year end
2008 these categories also represented the large majority of the OREO balance
for properties other than two-step. An extended recession could have a material
adverse impact on future levels of nonaccruing loans and OREO balances and
associated credit or property valuation adjustment losses within any of our loan
categories.
39
The
following table presents activity in the OREO portfolio related to loans other
than two-step loans for the periods shown:
|
|
|
2008
|
|
2007
|
|
(Dollars in
thousands)
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
(1)
|
|
Beginning balance January 1
|
|
$
|
-
|
|
|
1
|
|
|
$
|
-
|
|
1
|
|
Additions to OREO
|
|
|
-
|
|
|
|
|
|
|
-
|
|
-
|
|
Capitalized
improvements
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
Valuation
adjustments
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
Disposition of OREO
|
|
|
-
|
|
|
|
|
|
|
-
|
|
-
|
|
Ending balance
March 31
|
|
$
|
-
|
|
|
1
|
|
|
$
|
-
|
|
1
|
|
|
|
Additions to OREO
|
|
|
1,651
|
|
|
7
|
|
|
|
-
|
|
-
|
|
Capitalized
improvements
|
|
|
5
|
|
|
|
|
|
|
-
|
|
-
|
|
Valuation
adjustments
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
Disposition of OREO
|
|
|
(224
|
)
|
|
(1
|
)
|
|
|
-
|
|
-
|
|
Ending balance June 30
|
|
$
|
1,432
|
|
|
7
|
|
|
$
|
-
|
|
1
|
|
|
|
Additions to OREO
|
|
|
2,760
|
|
|
12
|
|
|
|
-
|
|
-
|
|
Capitalized
improvements
|
|
|
5
|
|
|
|
|
|
|
-
|
|
-
|
|
Valuation
adjustments
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
Disposition of OREO
|
|
|
(751
|
)
|
|
(3
|
)
|
|
|
-
|
|
-
|
|
Ending balance September
30
|
|
$
|
3,446
|
|
|
16
|
|
|
$
|
-
|
|
1
|
|
|
|
Additions to OREO
|
|
|
7,524
|
|
|
23
|
|
|
|
-
|
|
-
|
|
Capitalized
improvements
|
|
|
1
|
|
|
|
|
|
|
-
|
|
-
|
|
Valuation
adjustments
|
|
|
(499
|
)
|
|
|
|
|
|
-
|
|
|
|
Disposition of OREO
|
|
|
(384
|
)
|
|
(2
|
)
|
|
|
-
|
|
-
|
|
Ending balance December
31
|
|
$
|
10,088
|
|
|
37
|
|
|
$
|
-
|
|
1
|
|
|
|
Full year 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance January 1
|
|
$
|
-
|
|
|
1
|
|
|
$
|
-
|
|
1
|
|
Additions to OREO
|
|
|
11,935
|
|
|
42
|
|
|
|
-
|
|
-
|
|
Capitalized
improvements
|
|
|
11
|
|
|
-
|
|
|
|
-
|
|
-
|
|
Valuation
adjustments
|
|
|
(499
|
)
|
|
-
|
|
|
|
-
|
|
-
|
|
Disposition of OREO
|
|
|
(1,359
|
)
|
|
(6
|
)
|
|
|
-
|
|
-
|
|
Ending balance December
31
|
|
$
|
10,088
|
|
|
37
|
|
|
$
|
-
|
|
1
|
With an
increased number of properties in our non two-step OREO portfolio, we anticipate
a higher volume of property dispositions in 2009 compared to 2008. There can be
no assurance that such sales will not result in additional losses upon
sale.
Delinquencies - Loans Other
Than Two-Step Loans.
Total delinquencies
in the other than two-step loan portfolio, defined as loans 30 to 89 days past
due, declined slightly to $6.9 million or .34% at December 31, 2008, from $7.7
million or .40%, respectively, at December 31, 2007.
40
Construction Loans Other
Than Two-Step Loans.
The following
tables provide additional information regarding our real estate construction
portfolio for loans other than two-step loans, including additional breakdown of
that portfolio among land, residential construction and commercial construction
segments, and within each segment, among land, site development and vertical
construction loans.
The
following table shows the components of our construction and land loans outside
the two-step portfolio as of the dates shown:
|
|
|
Construction and land loans outside the
two-step portfolio
|
|
|
|
(Dollars in
thousands, unaudited)
|
|
December 31, 2008
|
|
December 31, 2007
|
|
Change
|
|
September 30, 2008
|
|
|
|
Amount
|
|
Percent
(2)
|
|
Amount
|
|
Percent
(2)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
(2)
|
|
Land loans
(1)
|
|
$
|
46,286
|
|
17
|
%
|
|
$
|
44,508
|
|
15
|
%
|
|
$
|
1,778
|
|
|
4
|
%
|
|
$
|
44,805
|
|
16
|
%
|
|
|
|
Residential construction loans other than two-step loans
|
|
|
136,024
|
|
49
|
%
|
|
|
165,359
|
|
55
|
%
|
|
|
(29,335
|
)
|
|
-18
|
%
|
|
|
144,517
|
|
52
|
%
|
|
Commercial
construction loans
|
|
|
92,616
|
|
34
|
%
|
|
|
90,671
|
|
30
|
%
|
|
|
1,945
|
|
|
2
|
%
|
|
|
88,630
|
|
32
|
%
|
|
|
|
Total construction and land
loans other than two-step loans
|
|
$
|
274,926
|
|
100
|
%
|
|
$
|
300,538
|
|
100
|
%
|
|
$
|
(25,612
|
)
|
|
-9
|
%
|
|
$
|
277,952
|
|
100
|
%
|
|
|
|
Components of residential construction and land loans
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than two-step loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
loans
(1)
|
|
$
|
23,495
|
|
15
|
%
|
|
$
|
23,461
|
|
12
|
%
|
|
$
|
34
|
|
|
0
|
%
|
|
$
|
24,038
|
|
14
|
%
|
|
Site development
|
|
|
64,728
|
|
40
|
%
|
|
|
84,620
|
|
45
|
%
|
|
|
(19,892
|
)
|
|
-24
|
%
|
|
|
71,125
|
|
42
|
%
|
|
Vertical
construction
|
|
|
71,296
|
|
45
|
%
|
|
|
80,739
|
|
43
|
%
|
|
|
(9,443
|
)
|
|
-12
|
%
|
|
|
73,392
|
|
44
|
%
|
|
Total residential construction
and land loans other than two-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
step loans
|
|
$
|
159,519
|
|
100
|
%
|
|
|
188,820
|
|
100
|
%
|
|
$
|
(29,301
|
)
|
|
-16
|
%
|
|
$
|
168,555
|
|
100
|
%
|
|
|
|
Components of commercial construction and land loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
loans
(1)
|
|
$
|
22,791
|
|
20
|
%
|
|
$
|
21,047
|
|
19
|
%
|
|
$
|
1,744
|
|
|
8
|
%
|
|
$
|
20,767
|
|
19
|
%
|
|
Site development
|
|
|
607
|
|
1
|
%
|
|
|
|
|
0
|
%
|
|
|
607
|
|
|
0
|
%
|
|
|
77
|
|
0
|
%
|
|
Vertical
construction
|
|
|
92,009
|
|
79
|
%
|
|
|
90,671
|
|
81
|
%
|
|
|
1,338
|
|
|
1
|
%
|
|
|
88,553
|
|
81
|
%
|
|
Total commercial construction
and land loans
|
|
$
|
115,407
|
|
100
|
%
|
|
$
|
111,718
|
|
100
|
%
|
|
$
|
3,689
|
|
|
3
|
%
|
|
$
|
109,397
|
|
100
|
%
|
|
|
|
Components of total construction and land loans other than
two-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
step loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
loans
(1)
|
|
$
|
46,286
|
|
17
|
%
|
|
$
|
44,508
|
|
15
|
%
|
|
$
|
1,778
|
|
|
4
|
%
|
|
$
|
44,805
|
|
16
|
%
|
|
Site development
|
|
|
65,335
|
|
24
|
%
|
|
|
84,620
|
|
28
|
%
|
|
|
(19,285
|
)
|
|
-23
|
%
|
|
|
71,202
|
|
26
|
%
|
|
Vertical
construction
|
|
|
163,305
|
|
59
|
%
|
|
|
171,410
|
|
57
|
%
|
|
|
(8,105
|
)
|
|
-5
|
%
|
|
|
161,945
|
|
58
|
%
|
|
|
|
Total construction and land
loans other than two-step loans
|
|
$
|
274,926
|
|
100
|
%
|
|
$
|
300,538
|
|
100
|
%
|
|
$
|
(25,612
|
)
|
|
-9
|
%
|
|
$
|
277,952
|
|
100
|
%
|
|
(1)
|
|
Land loans represent balances that are carried in the Company’s
residential real estate mortgage and commercial real estate loan
portfolios.
|
|
(2)
|
|
Calculations have been based on more detailed information and
therefore may not recompute exactly due to
rounding.
|
As shown in the table
above, residential construction loans represented nearly half of the real estate
construction and land loans outside the two-step portfolio, while the commercial
construction category accounted for about one third and land loans a modest 17%.
At $46 million, land loans represented approximately 2% of the Company’s total
loan portfolio at December 31, 2008. Our land loans typically had loan to value
ratios of 60% or less at the time of origination. The Bank’s land commitments
were split fairly evenly between commercial and residential uses. Approximately
$21 million, or 46%, of the Company’s land loans are located in Clark County,
Washington and in Multnomah County, Oregon.
In terms
of the combined construction and land loans, $163 million, or 59%, was for
vertical construction purposes, with the land component at 17% and site
development at 24%. In the residential category, the vertical construction
represented 45% of loan balances while land and site development combined
amounted to 55%. At this time, considering the Company’s experience in
disposition of homes in its two-step loan and OREO portfolios, we believe the
risk and loss exposure associated with residential vertical construction is less
than with land and site development loans. Residential land and site development
loans represented only 4% of the Company’s total loan portfolio at year end
2008.
Within the commercial construction
category, vertical construction accounted for the majority or 79% of the loan
balances.
41
The
following table shows the comparison of our unfunded commitments for
construction and land loans outside the two-step portfolio as of the dates
shown, together with the year over year change in unfunded commitment balances:
|
|
|
Unfunded commitments for construction and land other than
two-step
|
|
|
|
December 31, 2008
|
|
December 31, 2007
|
|
Change
|
|
|
(Dollars in
thousands, unaudited)
|
Amount
|
|
Amount
|
|
Amount
|
|
Percent
|
|
|
Land
|
$
|
3,070
|
|
$
|
1,384
|
|
$
|
1,686
|
|
|
121.8
|
%
|
|
|
Residential
construction other than two-step
|
|
33,699
|
|
|
106,696
|
|
|
(72,997
|
)
|
|
-68.4
|
%
|
|
|
Commercial construction
|
|
17,946
|
|
|
43,137
|
|
|
(25,191
|
)
|
|
-58.4
|
%
|
|
|
Total construction and land other than two-step
loans
|
$
|
54,715
|
|
$
|
151,217
|
|
$
|
(96,502
|
)
|
|
-63.8
|
%
|
|
|
|
|
|
Components
of accruing residential construction and land other than
two-step:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
$
|
234
|
|
$
|
1,344
|
|
$
|
(1,110
|
)
|
|
-82.6
|
%
|
|
|
Site development
|
|
4,065
|
|
|
9,700
|
|
|
(5,635
|
)
|
|
-58.1
|
%
|
|
|
Vertical
construction
|
|
29,634
|
|
|
96,996
|
|
|
(67,362
|
)
|
|
-69.4
|
%
|
|
|
Total residential construction and land other than
two-step
|
$
|
33,933
|
|
$
|
108,040
|
|
$
|
(74,107
|
)
|
|
-68.6
|
%
|
|
|
|
|
|
Components of accruing commercial construction and land:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
$
|
2,836
|
|
$
|
40
|
|
$
|
2,796
|
|
|
6990.0
|
%
|
|
|
Site development
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.0
|
%
|
|
|
Vertical
construction
|
|
17,946
|
|
|
43,137
|
|
|
(25,191
|
)
|
|
-58.4
|
%
|
|
|
Total commercial construction and land
|
$
|
20,782
|
|
$
|
43,177
|
|
$
|
(22,395
|
)
|
|
-51.9
|
%
|
|
|
|
|
|
Components
of total accruing construction and land other than two-step:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
$
|
3,070
|
|
$
|
1,384
|
|
$
|
1,686
|
|
|
121.8
|
%
|
|
|
Site development
|
|
4,065
|
|
|
9,700
|
|
|
(5,635
|
)
|
|
-58.1
|
%
|
|
|
Vertical
construction
|
|
47,580
|
|
|
140,133
|
|
|
(92,553
|
)
|
|
-66.0
|
%
|
|
|
Total construction and land other than two-step
loans
|
$
|
54,715
|
|
$
|
151,217
|
|
$
|
(96,502
|
)
|
|
-63.8
|
%
|
As shown in the table above, the
unfunded commitment for land and construction loans outside the two-step
portfolio declined by $96.5 million or a material 64% during 2008. The volume of
new commitments made fell substantially during 2008, and did not offset the
commitments drawn or paid off.
42
The
following table shows the components of our nonaccrual construction and land
loans outside the two-step portfolio as of the dates shown:
|
|
Nonaccrual construction and land loans oustide the two-step
portfolio
|
|
|
December 31, 2008
|
|
December 31, 2007
|
|
Change
|
|
September 30, 2008
|
|
|
|
|
Percent of
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
loan
|
|
|
|
loan
|
|
|
|
|
|
|
|
loan
|
|
(Dollars in
thousands, unaudited)
|
Amount
|
|
category
(2)
|
|
Amount
|
|
category
(2)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
category
(2)
|
|
Land loans
(1)
|
$
|
5,794
|
|
12.5
|
%
|
|
$
|
306
|
|
0.7
|
%
|
|
$
|
5,488
|
|
1793.5
|
%
|
|
$
|
5,308
|
|
11.8
|
%
|
|
Residential
construction loans other than two-step loans
|
|
36,994
|
|
27.2
|
%
|
|
|
1,576
|
|
1.0
|
%
|
|
|
35,418
|
|
2247.3
|
%
|
|
|
21,025
|
|
14.5
|
%
|
|
Commercial construction loans
|
|
2,922
|
|
3.2
|
%
|
|
|
-
|
|
0.0
|
%
|
|
|
2,922
|
|
0.0
|
%
|
|
|
-
|
|
0.0
|
%
|
|
Total nonaccrual construction and land loans other
than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
two-step loans
|
$
|
45,710
|
|
16.6
|
%
|
|
$
|
1,882
|
|
0.6
|
%
|
|
$
|
43,828
|
|
2328.8
|
%
|
|
$
|
26,333
|
|
9.5
|
%
|
|
|
|
Components of nonaccrual residential construction and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
land loans other than two-step loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
loans
(1)
|
$
|
5,608
|
|
23.9
|
%
|
|
$
|
306
|
|
1.3
|
%
|
|
$
|
5,302
|
|
1732.7
|
%
|
|
$
|
5,308
|
|
22.1
|
%
|
|
Site development
|
|
27,291
|
|
42.2
|
%
|
|
|
-
|
|
0.0
|
%
|
|
|
27,291
|
|
0.0
|
%
|
|
|
13,731
|
|
19.3
|
%
|
|
Vertical
construction
|
|
9,703
|
|
13.6
|
%
|
|
|
1,576
|
|
2.0
|
%
|
|
|
8,127
|
|
515.7
|
%
|
|
|
7,294
|
|
9.9
|
%
|
|
Total nonaccrual residential construction and land
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other than two-step loans
|
$
|
42,602
|
|
26.7
|
%
|
|
$
|
1,882
|
|
1.0
|
%
|
|
$
|
40,720
|
|
2163.7
|
%
|
|
$
|
26,333
|
|
15.6
|
%
|
|
|
|
Components of nonaccrual commercial construction and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
land loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
loans
(1)
|
|
186
|
|
0.8
|
%
|
|
|
-
|
|
0.0
|
%
|
|
$
|
186
|
|
0.0
|
%
|
|
|
-
|
|
0.0
|
%
|
|
Site development
|
|
-
|
|
0.0
|
%
|
|
|
-
|
|
0.0
|
%
|
|
|
-
|
|
0.0
|
%
|
|
|
-
|
|
0.0
|
%
|
|
Vertical
construction
|
|
2,922
|
|
3.2
|
%
|
|
|
-
|
|
0.0
|
%
|
|
|
2,922
|
|
0.0
|
%
|
|
|
-
|
|
0.0
|
%
|
|
Total nonaccrual commercial construction and
land
loans
|
$
|
3,108
|
|
2.7
|
%
|
|
$
|
-
|
|
0.0
|
%
|
|
$
|
3,108
|
|
0.0
|
%
|
|
$
|
-
|
|
0.0
|
%
|
|
|
|
Components of total nonaccrual construction and land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans other than two-step
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
loans
(1)
|
$
|
5,794
|
|
12.5
|
%
|
|
$
|
306
|
|
0.7
|
%
|
|
$
|
5,488
|
|
1793.5
|
%
|
|
$
|
5,308
|
|
11.8
|
%
|
|
Site development
|
|
27,291
|
|
41.8
|
%
|
|
|
-
|
|
0.0
|
%
|
|
|
27,291
|
|
0.0
|
%
|
|
|
13,731
|
|
19.3
|
%
|
|
Vertical
construction
|
|
12,625
|
|
7.7
|
%
|
|
|
1,576
|
|
0.9
|
%
|
|
|
11,049
|
|
701.1
|
%
|
|
|
7,294
|
|
4.5
|
%
|
|
Total nonaccrual construction and land loans other
than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
two-step loans
|
$
|
45,710
|
|
16.6
|
%
|
|
$
|
1,882
|
|
0.6
|
%
|
|
$
|
43,828
|
|
2328.8
|
%
|
|
$
|
26,333
|
|
9.5
|
%
|
|
(1)
|
|
Land loans represent balances that are carried in the
Company’s residential real estate mortgage and commercial real estate
loan
|
|
(2)
|
|
Calculations have been based on more detailed
information and therefore may not recompute exactly due to
rounding.
|
As indicated in the above table and
reflecting the difficulties in the housing market, $42.6 million in nonaccrual
construction and land loan balances outside the two-step portfolio related to
the residential category. The residential construction nonaccrual balance
increased from prior periods and represented 26.7% of residential construction
and land loans outstanding at December 31, 2008. The residential nonaccrual
loans were mainly in the site development component where the nonaccruals were
42.2% of these loan balances at year end 2008. Nonaccrual commercial
construction and commercial land loans were $3.1 million or 2.7% of such loans
at December 31, 2008.
43
The
following table shows the components of our accruing construction and land loans
outside the two-step portfolio as of the dates shown, together with the year
over year change in loan balances:
|
|
Accruing construction and land loans oustide the two-step
portfolio
|
|
|
December 31, 2008
|
|
December 31, 2007
|
|
Change
|
|
September 30, 2008
|
|
|
|
|
Percent of
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
loan
|
|
|
|
loan
|
|
|
|
|
|
|
|
loan
|
|
(Dollars in
thousands, unaudited)
|
Amount
|
|
category
(2)
|
|
Amount
|
|
category
(2)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
category
(2)
|
|
Land loans
(1)
|
$
|
40,492
|
|
87.5
|
%
|
|
$
|
44,202
|
|
99.3
|
%
|
|
$
|
(3,710
|
)
|
|
-8.4
|
%
|
|
$
|
39,497
|
|
88.2
|
%
|
|
loans
|
|
99,030
|
|
72.8
|
%
|
|
|
163,783
|
|
99.0
|
%
|
|
|
(64,753
|
)
|
|
-39.5
|
%
|
|
|
123,492
|
|
85.5
|
%
|
|
Commercial construction loans
|
|
89,694
|
|
96.8
|
%
|
|
|
90,671
|
|
100.0
|
%
|
|
|
(977
|
)
|
|
-1.1
|
%
|
|
|
88,630
|
|
100.0
|
%
|
|
Total accruing construction and land loans other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than
two-step loans
|
$
|
229,216
|
|
83.4
|
%
|
|
$
|
298,656
|
|
99.4
|
%
|
|
$
|
(69,440
|
)
|
|
-23.3
|
%
|
|
$
|
251,619
|
|
90.5
|
%
|
|
|
|
Components of accruing residential construction and land
loans other than two-step loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land loans
(1)
|
$
|
17,887
|
|
76.1
|
%
|
|
$
|
23,155
|
|
98.7
|
%
|
|
$
|
(5,268
|
)
|
|
-22.8
|
%
|
|
$
|
18,730
|
|
77.9
|
%
|
|
Site development
|
|
37,437
|
|
57.8
|
%
|
|
|
84,620
|
|
100.0
|
%
|
|
|
(47,183
|
)
|
|
-55.8
|
%
|
|
|
57,394
|
|
80.7
|
%
|
|
Vertical
construction
|
|
61,593
|
|
86.4
|
%
|
|
|
79,163
|
|
98.0
|
%
|
|
|
(17,570
|
)
|
|
-22.2
|
%
|
|
|
66,098
|
|
90.1
|
%
|
|
Total accruing residential construction and
land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans other than two-step loans
|
$
|
116,917
|
|
73.3
|
%
|
|
$
|
186,938
|
|
99.0
|
%
|
|
$
|
(70,021
|
)
|
|
-37.5
|
%
|
|
$
|
142,222
|
|
84.4
|
%
|
|
|
|
Components of accruing commercial construction and land
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land loans
(1)
|
|
22,605
|
|
99.2
|
%
|
|
|
21,047
|
|
100.0
|
%
|
|
$
|
1,558
|
|
|
7.4
|
%
|
|
|
20,767
|
|
100.0
|
%
|
|
Site development
|
|
607
|
|
100.0
|
%
|
|
|
-
|
|
0.0
|
%
|
|
|
607
|
|
|
0.0
|
%
|
|
|
77
|
|
100.0
|
%
|
|
Vertical
construction
|
|
89,087
|
|
96.8
|
%
|
|
|
90,671
|
|
100.0
|
%
|
|
|
(1,584
|
)
|
|
-1.7
|
%
|
|
|
88,553
|
|
100.0
|
%
|
|
loans
|
$
|
112,299
|
|
97.3
|
%
|
|
$
|
111,718
|
|
100.0
|
%
|
|
$
|
581
|
|
|
0.5
|
%
|
|
$
|
109,397
|
|
100.0
|
%
|
|
|
|
Components of total accruing construction and land loans
other than two-step loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land loans
(1)
|
$
|
40,492
|
|
87.5
|
%
|
|
$
|
44,202
|
|
99.3
|
%
|
|
$
|
(3,710
|
)
|
|
-8.4
|
%
|
|
$
|
39,497
|
|
88.2
|
%
|
|
Site development
|
|
38,044
|
|
58.2
|
%
|
|
|
84,620
|
|
100.0
|
%
|
|
|
(46,576
|
)
|
|
-55.0
|
%
|
|
|
57,471
|
|
80.7
|
%
|
|
Vertical
construction
|
|
150,680
|
|
92.3
|
%
|
|
|
169,834
|
|
99.1
|
%
|
|
|
(19,154
|
)
|
|
-11.3
|
%
|
|
|
154,651
|
|
95.5
|
%
|
|
Total accruing construction and land loans
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than two-step loans
|
$
|
229,216
|
|
83.4
|
%
|
|
$
|
298,656
|
|
99.4
|
%
|
|
$
|
(69,440
|
)
|
|
-23.3
|
%
|
|
$
|
251,619
|
|
90.5
|
%
|
|
(1)
|
|
Land loans represent balances that are carried in the
Company’s residential real estate mortgage and commercial real estate loan
portfolios.
|
|
(2)
|
|
Calculations have been based on more detailed
information and therefore may not recompute exactly due to
rounding.
|
At
December 31, 2008, there were $116.9 million in accruing residential
construction and land loans, of which $55.3 million was associated with
residential land and site development, a decline from $107.8 million at December
31, 2007.
44
The
following table shows the components of our delinquent construction and land
loans outside the two-step portfolio as of the dates shown:
|
|
Delinquent construction and land loans outside the two-step loan
portfolio
|
|
|
December 31, 2008
|
|
December 31, 2007
|
|
Change
|
|
September 30, 2008
|
|
|
|
|
Percent of
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
loan
|
|
|
|
loan
|
|
|
|
|
|
|
|
|
loan
|
|
(Dollars in
thousands, unaudited)
|
Amount
|
|
category
(2)
|
|
Amount
|
|
category
(2)
|
|
Amount
|
|
|
Percent
|
|
Amount
|
|
category
(2)
|
|
Land loans
(1)
|
$
|
638
|
|
1.38
|
%
|
|
$
|
487
|
|
1.09
|
%
|
|
$
|
151
|
|
|
31.0
|
%
|
|
$
|
461
|
|
1.03
|
%
|
|
Residential
construction loans other than two-step loans
|
|
698
|
|
0.51
|
%
|
|
|
163
|
|
0.10
|
%
|
|
|
535
|
|
|
328.2
|
%
|
|
|
7,241
|
|
5.01
|
%
|
|
Commercial construction loans
|
|
-
|
|
0.00
|
%
|
|
|
-
|
|
0.00
|
%
|
|
|
-
|
|
|
0.0
|
%
|
|
|
807
|
|
0.91
|
%
|
|
Total 30-89 days past due
construction loans other than two-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
step
loans
|
$
|
1,336
|
|
0.49
|
%
|
|
$
|
650
|
|
0.22
|
%
|
|
$
|
686
|
|
|
105.5
|
%
|
|
$
|
8,509
|
|
3.06
|
%
|
|
|
|
Components of 30-89 days past due residential construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and land loans other than two-step
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land loans
(1)
|
$
|
165
|
|
0.70
|
%
|
|
$
|
487
|
|
2.08
|
%
|
|
$
|
(322
|
)
|
|
-66.1
|
%
|
|
$
|
461
|
|
1.92
|
%
|
|
Site development
|
|
131
|
|
0.20
|
%
|
|
|
-
|
|
0.00
|
%
|
|
|
131
|
|
|
0.0
|
%
|
|
|
5,586
|
|
7.85
|
%
|
|
Vertical
construction
|
|
567
|
|
0.80
|
%
|
|
|
163
|
|
0.20
|
%
|
|
|
404
|
|
|
247.9
|
%
|
|
|
1,655
|
|
2.26
|
%
|
|
Total 30-89 days past due residential construction
and land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans other than two-step loans
|
$
|
863
|
|
0.54
|
%
|
|
$
|
650
|
|
0.34
|
%
|
|
$
|
213
|
|
|
32.8
|
%
|
|
$
|
7,702
|
|
4.57
|
%
|
|
|
|
Components of 30-89 days past due commercial construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and land loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land loans
(1)
|
$
|
473
|
|
2.08
|
%
|
|
$
|
-
|
|
0.00
|
%
|
|
$
|
473
|
|
|
0.0
|
%
|
|
$
|
-
|
|
0.00
|
%
|
|
Site development
|
|
-
|
|
0.00
|
%
|
|
|
-
|
|
0.00
|
%
|
|
|
-
|
|
|
0.0
|
%
|
|
|
-
|
|
0.00
|
%
|
|
Vertical
construction
|
|
-
|
|
0.00
|
%
|
|
|
-
|
|
0.00
|
%
|
|
|
-
|
|
|
0.0
|
%
|
|
|
807
|
|
0.91
|
%
|
|
Total 30-89 days past due commercial construction
and land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans
|
$
|
473
|
|
0.41
|
%
|
|
$
|
-
|
|
0.00
|
%
|
|
$
|
473
|
|
|
0.0
|
%
|
|
$
|
807
|
|
0.74
|
%
|
|
|
|
Components of total 30-89 days past due construction and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
land loans other than two-step
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land loans
(1)
|
$
|
638
|
|
1.38
|
%
|
|
$
|
487
|
|
1.09
|
%
|
|
$
|
151
|
|
|
31.0
|
%
|
|
$
|
461
|
|
1.03
|
%
|
|
Site development
|
|
131
|
|
0.20
|
%
|
|
|
-
|
|
0.00
|
%
|
|
|
131
|
|
|
0.0
|
%
|
|
|
5,586
|
|
7.85
|
%
|
|
Vertical
construction
|
|
567
|
|
0.35
|
%
|
|
|
163
|
|
0.10
|
%
|
|
|
404
|
|
|
247.9
|
%
|
|
|
2,462
|
|
1.52
|
%
|
|
Total 30-89 days past due construction and land
loans other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than two-step loans
|
$
|
1,336
|
|
0.49
|
%
|
|
$
|
650
|
|
0.22
|
%
|
|
$
|
686
|
|
|
105.5
|
%
|
|
$
|
8,509
|
|
3.06
|
%
|
|
(1)
|
|
Land loans represent balances that are carried in the
Company’s residential real estate mortgage and commercial real estate loan
portfolios.
|
|
(2)
|
|
Calculations have been based on more detailed
information and therefore may not recompute exactly due to
rounding.
|
Delinquent construction and land loans
outside the two-step portfolio measured .49% of such loans as of December 31,
2008, up from .22% at December 31, 2007 and down from 3.06% at September 30,
2008. The majority of the $1.3 million in delinquent construction and land loans
at year end 2008 was concentrated in the residential category.
45
Allowance for Credit Losses and Net
Loan Charge-offs – Loans Other Than Two-Step Loans
Allowance for Credit Losses -
Loans Other Than Two-Step Loans.
The
provision for credit losses for loans other than two-step loans during 2008 was
$30.9 million, up from $8.0 million in 2007. The largest driver of the higher
provision for credit losses for this category was net loan charge-offs. Other
factors contributing to higher provision for credit losses were a negative risk
rating migration and higher general valuation allowance percentages in the
allowance model. Net loan charge-offs were $25.2 million for the year ended
December 31, 2008, compared to $4.5 million for the year ended December 31,
2007. The risk rating migration largely consisted of commercial loans and
residential construction loans to builders being moved to higher risk rating
categories. At December 31, 2008, the allowance for credit losses for loans
other than two-step loans of $29.5 million consisted of a $26.6 million formula
allowance, no specific allowance, a $1.9 million unallocated allowance, and a
$1.0 million reserve for unfunded commitments. At December 31, 2007, the
allowance for credit losses for loans other than two-step loans of $23.8 million
consisted of a $20.3 million formula allowance, a $.7 million specific
allowance, a $1.9 million unallocated allowance, and a $.9 million reserve for
unfunded commitments. The following table presents information with respect to
the change in our allowance for credit losses relating to loans other than
two-step loans:
|
|
|
Year
ended
|
|
Year
ended
|
|
|
|
December 31,
|
|
December 31,
|
|
|
(Dollars in
thousands, unaudited)
|
2008
|
|
2007
|
|
|
Allowance for credit losses, beginning of period
|
$
|
23,838
|
|
|
$
|
20,399
|
|
|
|
Provision for credit losses
|
|
30,867
|
|
|
|
7,976
|
|
|
|
Loan charge-offs:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
6,464
|
|
|
|
3,798
|
|
|
|
Commercial real estate construction
|
|
1,422
|
|
|
|
-
|
|
|
|
Residential real estate construction
|
|
10,105
|
|
|
|
-
|
|
|
|
Total real estate construction
|
|
11,527
|
|
|
|
-
|
|
|
|
Standard mortgages
|
|
1,811
|
|
|
|
-
|
|
|
|
Nonstandard mortgages
|
|
3,036
|
|
|
|
-
|
|
|
|
Home equity
|
|
249
|
|
|
|
71
|
|
|
|
Total real estate mortgage
|
|
5,096
|
|
|
|
71
|
|
|
|
Commercial real estate
|
|
826
|
|
|
|
-
|
|
|
|
Installment and consumer
|
|
531
|
|
|
|
254
|
|
|
|
Overdraft
|
|
1,328
|
|
|
|
1,050
|
|
|
|
Total loan charge-offs
|
|
25,772
|
|
|
|
5,173
|
|
|
|
Loan
recoveries:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
203
|
|
|
|
269
|
|
|
|
Commercial real estate construction
|
|
-
|
|
|
|
-
|
|
|
|
Residential real estate construction
|
|
-
|
|
|
|
-
|
|
|
|
Total real estate construction
|
|
-
|
|
|
|
-
|
|
|
|
Standard mortgages
|
|
-
|
|
|
|
-
|
|
|
|
Nonstandard mortgages
|
|
38
|
|
|
|
-
|
|
|
|
Home equity
|
|
32
|
|
|
|
33
|
|
|
|
Total real estate mortgage
|
|
70
|
|
|
|
33
|
|
|
|
Commercial real estate
|
|
-
|
|
|
|
2
|
|
|
|
Installment and consumer
|
|
78
|
|
|
|
112
|
|
|
|
Overdraft
|
|
229
|
|
|
|
220
|
|
|
|
Total loan recoveries
|
|
580
|
|
|
|
636
|
|
|
|
Net charge-offs
|
|
25,192
|
|
|
|
4,537
|
|
|
|
Total allowance
for credit losses
|
$
|
29,513
|
|
|
$
|
23,838
|
|
|
|
Components of allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
$
|
28,500
|
|
|
$
|
23,000
|
|
|
|
Reserve for unfunded commitments
|
|
1,013
|
|
|
|
838
|
|
|
|
Total allowance
for credit losses
|
$
|
29,513
|
|
|
$
|
23,838
|
|
|
|
Net loan charge-offs to average loans
|
|
1.17
|
%
|
|
|
0.22
|
%
|
|
|
Allowance for
loan losses to total loans
|
|
1.42
|
%
|
|
|
1.20
|
%
|
|
|
Allowance for credit losses to total loans
|
|
1.47
|
%
|
|
|
1.25
|
%
|
|
|
Allowance for
loan losses to nonperforming loans
|
|
37
|
%
|
|
|
391
|
%
|
|
|
Allowance for credit losses to nonperforming loans
|
|
38
|
%
|
|
|
405
|
%
|
Net Loan Charge-offs – Loans
Other Than Two-Step Loans.
The $25.2
million net loan
charge-offs for loans other than two-step loans in 2008 were largely
attributable to losses related to the commercial, residential real estate
construction and the nonstandard mortgage loan categories. Net overdraft losses
were $1.1 million in 2008 compared to $.8 million for 2007. Overdrafts are
specifically reserved for in our allowance for credit losses.
46
Two-Step Loan
Portfolio
At
December 31, 2008, the outstanding balance of loans originated in the two-step
loan program was $53.1 million, down 80% from $263.0 million at December 31,
2007. Over the same period unused commitments in the two-step portfolio fell
from $78.6 million to $.2 million as no originations of two step credits were
made in 2008.
The
following table presents two-step loan balance, unused commitment and total
commitment detail as of the end of each period presented:
|
|
(Dollars in
thousands)
|
|
|
|
|
|
Two-step total
commitments
|
|
|
|
|
Two-step
|
|
Two-step
loan
|
|
(loan
balance
|
|
|
Period ended
|
|
loan balance
|
|
unused commitments
|
|
plus unused commitments)
|
|
|
December 31, 2006
|
|
171,692
|
|
132,732
|
|
304,424
|
|
|
December 31,
2007
|
|
262,952
|
|
78,585
|
|
341,537
|
|
|
March 31, 2008
|
|
211,406
|
|
34,201
|
|
245,607
|
|
|
June 30,
2008
|
|
145,703
|
|
12,628
|
|
158,331
|
|
|
September 30, 2008
|
|
97,894
|
|
2,039
|
|
99,933
|
|
|
December 31,
2008
|
|
53,084
|
|
152
|
|
53,236
|
|
|
The
following table illustrates two-step loans and commitments by geographic
areas:
|
|
|
|
|
|
(Dollars in
thousands)
|
December 31,
|
|
December 31,
|
|
|
Region
|
2008
|
|
2007
|
|
|
Western Washington (Olympia, Seattle)
|
$
|
14,222
|
|
$
|
113,331
|
|
|
Portland, Oregon
/ Vancouver, Washington
|
|
14,113
|
|
|
102,336
|
|
|
Central Oregon (Bend, Redmond)
|
|
8,766
|
|
|
44,310
|
|
|
Willamette
Valley (Salem, Eugene)
|
|
7,750
|
|
|
34,331
|
|
|
Oregon Coast (Newport, Lincoln City)
|
|
5,658
|
|
|
32,655
|
|
|
Southern Oregon
(Medford, Roseburg)
|
|
2,727
|
|
|
14,574
|
|
|
Total residential real estate construction loan
originations
|
$
|
53,236
|
|
$
|
341,537
|
Nonperforming Assets and
Delinquencies – Two-Step Loans
Nonperforming Assets – Two-Step Loans.
The following table presents information about our nonperforming assets,
delinquencies and the allowance for credit losses relating to two-step loans at
the dates shown:
|
(Dollars in
thousands)
|
December 31,
|
|
September 30,
|
|
|
2008
|
|
|
2007
|
|
2008
|
|
Non-accruing two-step loans
|
$
|
49,960
|
|
|
$
|
20,545
|
|
|
$
|
82,990
|
|
|
90 day past and
accruing interest two-step loans
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total nonperforming two-step loans
|
|
49,960
|
|
|
|
20,545
|
|
|
|
82,990
|
|
|
|
|
Other real estate owned two-step
|
|
60,022
|
|
|
|
3,255
|
|
|
|
44,675
|
|
|
Total
nonperforming two-step assets
|
$
|
109,982
|
|
|
$
|
23,800
|
|
|
$
|
127,665
|
|
|
|
|
Delinquent two-step loans 30-89 days past due
|
$
|
1,242
|
|
|
$
|
36,778
|
|
|
$
|
4,089
|
|
|
|
|
Nonperforming two-step loans to total two-step loans
|
|
94.11
|
%
|
|
|
7.81
|
%
|
|
|
84.78
|
%
|
|
Nonperforming
two-step assets to total assets
|
|
4.28
|
%
|
|
|
0.90
|
%
|
|
|
4.96
|
%
|
|
Delinquent two-step loans to total two-step loans
|
|
2.34
|
%
|
|
|
13.99
|
%
|
|
|
4.18
|
%
|
Nonperforming two-step assets were $110.0 million at December 31, 2008,
up from $23.8 million at December 31, 2007, but a decrease of $17.7 million from
its peak of $127.7 million at September 30, 2008. At December 31, 2008, total
nonperforming two-step assets consisted of $50.0 million in nonaccrual loans and
$60.0 million in OREO (which included 251 residential properties). We believe
nonperforming two-step assets will decline materially during 2009.
47
The
following table presents activity in the two-step OREO portfolio and for short
sales for the periods shown. A “short sale” is an alternative to foreclosure
that occurs when the Bank allows a borrower to sell a property held by the Bank
as collateral for a loan and accepts the proceeds of sale in full satisfaction
of the loan:
|
|
Two-step related OREO
|
|
|
|
Total two-step OREO property sales
|
|
(Dollars in
thousands)
|
activity
|
|
Two-step short sales
|
|
and
short sales
|
|
Quarterly
2008:
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Beginning balance January 1
|
$
|
3,255
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to OREO
|
|
2,461
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized improvements
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation adjustments
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposition of OREO properties and short
sales
|
|
(274
|
)
|
|
(1
|
)
|
|
$
|
(286
|
)
|
|
(1
|
)
|
|
$
|
(560
|
)
|
|
(2
|
)
|
|
Ending balance
March 31
|
$
|
5,688
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to OREO
|
|
23,546
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized improvements
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation adjustments
|
|
(245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposition of OREO properties and short sales
|
|
(2,717
|
)
|
|
(9
|
)
|
|
$
|
(4,368
|
)
|
|
(14
|
)
|
|
$
|
(7,085
|
)
|
|
(23
|
)
|
|
Ending balance June 30
|
$
|
26,460
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to OREO
|
|
24,025
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized improvements
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation adjustments
|
|
(1,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposition of OREO properties and short sales
|
|
(4,867
|
)
|
|
(19
|
)
|
|
$
|
(3,200
|
)
|
|
(12
|
)
|
|
$
|
(8,067
|
)
|
|
(31
|
)
|
|
Ending balance September 30
|
$
|
44,675
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to OREO
|
|
25,831
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized improvements
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation adjustments
|
|
(2,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposition of OREO properties and short sales
|
|
(8,271
|
)
|
|
(28
|
)
|
|
$
|
(3,594
|
)
|
|
(13
|
)
|
|
$
|
(11,865
|
)
|
|
(41
|
)
|
|
Ending balance December 31
|
$
|
60,022
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full year 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance January 1
|
$
|
3,255
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to OREO
|
|
75,863
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized improvements
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation adjustments
|
|
(4,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposition of OREO properties and short sales
|
|
(16,129
|
)
|
|
(57
|
)
|
|
$
|
(11,448
|
)
|
|
(40
|
)
|
|
$
|
(27,577
|
)
|
|
(97
|
)
|
|
Ending balance December 31
|
$
|
60,022
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
2008 the Company added 294 two-step related properties valued at $75.9 million
to OREO and disposed of 57 such OREO properties for aggregate proceeds of $16.1
million. The Company also completed 40 short sales that reduced the two-step
nonaccrual loan balance by $11.4 million in 2008. Two-step OREO represents real
property which the Bank has taken substantial possession of or that has been
deeded to the Bank through a deed-in-lieu of foreclosure, non-judicial
foreclosure, judicial foreclosure or similar process in partial or full
satisfaction of a loan or loans. It typically takes two to seven months
following initial delinquency before property is recorded into OREO depending
upon the resolution strategy and the complexities associated with the specific
property. Losses on two-step short sales and write downs on two-step loans prior
to taking ownership of property in OREO were charged directly to the two-step
allowance for loan losses.
The Company will assume ownership of
significantly fewer two-step related properties in 2009 compared to 2008.
Delinquencies - Two-Step Loans.
Delinquencies in the two-step loan portfolio decreased significantly to
$1.2 million at December 31, 2008, from $36.8 million at year end 2007.
Delinquent two-step loans were 2.3% of the remaining two-step loan balance at
December 31, 2008, down from 14.0% at December 31, 2007.
48
Allowance for Credit Losses and Net
Loan Charge-offs – Two-Step Loans
Allowance for Credit Losses
- Two-Step Loans.
The allowance for credit losses associated with the two-step
loan portfolio decreased to $.4 million from $31.1 million at year end 2007 as
the accruing two-step loans decreased to $3.1 million from $242.4 million during
2008. All nonaccrual two-step loans have been impaired with any loss recorded as
a charge-off, and as a result, did not carry an associated allowance for credit
losses at year end 2008. We will continue to record actual future charge-offs in
the two-step loan portfolio against the allowance for loan losses associated
with the portfolio.
The
following table presents information with respect to the change in our allowance
for credit losses relating to the two-step loan portfolio:
|
|
(Dollars in
thousands)
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
Allowance for credit losses two-step loans, beginning of
period
|
$
|
31,065
|
|
|
$
|
2,618
|
|
|
|
Provision for credit losses two-step loans
|
|
9,500
|
|
|
|
30,980
|
|
|
|
|
|
|
Charge-offs two-step loans
|
|
(42,483
|
)
|
|
|
(2,540
|
)
|
|
|
Recoveries two-step loans
|
|
2,339
|
|
|
|
7
|
|
|
|
Net loan charge-offs two-step loans
|
|
(40,144
|
)
|
|
|
(2,533
|
)
|
|
|
Total allowance
for credit losses two-step loans
|
$
|
421
|
|
|
$
|
31,065
|
|
|
|
|
|
|
Components of allowance for credit losses two-step loans
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses two-step loans
|
$
|
420
|
|
|
$
|
23,917
|
|
|
|
Reserve for unfunded commitments two-step
loans
|
|
1
|
|
|
|
7,148
|
|
|
|
Total allowance
for credit losses two-step loans
|
$
|
421
|
|
|
$
|
31,065
|
|
|
|
|
|
|
Net two-step loan charge-offs to average total loans
|
|
1.87
|
%
|
|
|
0.12
|
%
|
|
|
Allowance for
two-step loan losses to accruing two-step loans
(1)
|
|
13.44
|
%
|
|
|
9.87
|
%
|
|
(1)
|
|
Two-step nonaccrual loans are net of chargeoffs previously taken
against the balance.
|
The following table provides
additional two-step loan and allowance for credit losses information:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
credit losses
on two-
|
|
Allowance for
credit losses on
|
|
|
|
|
|
|
|
|
|
|
Total accruing
two-
|
|
Allowance
for
|
|
step loans as a
% of
|
|
two-step loans
as a % of total
|
|
|
|
|
Total
two-step
|
|
Nonperforming
two-
|
|
Accruing
two-step
|
|
step
loan
|
|
credit losses
on two-
|
|
accruing two-step
|
|
accruing
two-step loan
|
|
|
Period ended
|
|
loans
|
|
step loans
|
|
loans
|
|
commitments
|
|
step loans
|
|
loans
|
|
commitments
|
|
|
12/31/2007
|
|
$
|
262,952
|
|
$
|
20,545
|
|
$
|
242,407
|
|
$
|
320,991
|
|
$
|
31,065
|
|
12.8
|
%
|
|
9.7
|
%
|
|
|
3/31/2008
|
|
|
211,406
|
|
|
88,784
|
|
|
122,622
|
|
|
156,823
|
|
|
11,812
|
|
9.6
|
%
|
|
7.5
|
%
|
|
|
6/30/2008
|
|
|
145,703
|
|
|
98,728
|
|
|
46,975
|
|
|
59,603
|
|
|
5,280
|
|
11.2
|
%
|
|
8.9
|
%
|
|
|
9/30/2008
|
|
|
97,894
|
|
|
82,990
|
|
|
14,904
|
|
|
16,943
|
|
|
1,502
|
|
10.1
|
%
|
|
8.9
|
%
|
|
|
12/31/2008
|
|
|
53,084
|
|
|
49,960
|
|
|
3,124
|
|
|
3,276
|
|
|
421
|
|
13.5
|
%
|
|
12.9
|
%
|
Net
Loan Charge-offs – Two-Step Loans.
Net
loan
charge-offs in the two-step loan portfolio were $40.1 million for the
twelve months ended December 31, 2008, up from $2.5 million for the same period
in 2007. Because nonperforming two-step loans have been impaired and written
down to the lower of the loan balance and fair value less estimated costs to
sell, we expect net charge-offs for the two-step portfolio to decline materially
in 2009.
49
Deposits and Borrowings
We predominantly use a mix of
deposits and borrowings to fund earning assets. The composition of our funding
mix has and will continue to depend on our funding needs, interest rate risk
position, funding costs of the various alternatives, the level and shape of the
yield curve, collateral requirements, customer demand for deposit products, the
level of FDIC insurance available to customers and the relative cost and
availability of other funding sources including government lending or investment
programs, and on credit market conditions. Our marketing efforts are primarily
focused on growing business and consumer accounts and balances in lower cost
products such as demand deposits, interest bearing demand, savings and money
market accounts. Borrowings as well as brokered deposits may be used to manage
short-term and long-term funding needs when they are less expensive than
deposits, or when necessary to adjust our interest rate risk position.
The
following table summarizes the average amount of, and the average rate paid on,
each of the deposit and borrowing categories for the periods shown:
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
Percent
|
|
Rate
|
|
|
|
Percent
|
|
Rate
|
|
|
|
Percent
|
|
Rate
|
|
(Dollars in
thousands)
|
Average Balance
|
|
of total
|
|
Paid
|
|
Average Balance
|
|
of total
|
|
Paid
|
|
Average Balance
|
|
of total
|
|
Paid
|
|
Demand deposits
|
$
|
470,601
|
|
23.0
|
%
|
|
-
|
|
|
$
|
479,310
|
|
23.3
|
%
|
|
-
|
|
|
$
|
466,282
|
|
25.6
|
%
|
|
-
|
|
|
Interest bearing
demand
|
|
279,227
|
|
13.6
|
%
|
|
0.70
|
%
|
|
|
278,734
|
|
13.6
|
%
|
|
1.23
|
%
|
|
|
259,054
|
|
14.2
|
%
|
|
0.86
|
%
|
|
Savings
|
|
71,542
|
|
3.5
|
%
|
|
0.81
|
%
|
|
|
72,787
|
|
3.6
|
%
|
|
0.78
|
%
|
|
|
80,029
|
|
4.4
|
%
|
|
0.57
|
%
|
|
Money
market
|
|
658,360
|
|
32.2
|
%
|
|
2.22
|
%
|
|
|
665,037
|
|
32.5
|
%
|
|
3.75
|
%
|
|
|
558,734
|
|
30.7
|
%
|
|
3.42
|
%
|
|
Time deposits
|
|
566,195
|
|
27.7
|
%
|
|
3.60
|
%
|
|
|
554,263
|
|
27.0
|
%
|
|
4.70
|
%
|
|
|
457,077
|
|
25.1
|
%
|
|
4.19
|
%
|
|
Total deposits
|
|
2,045,925
|
|
100
|
%
|
|
2.38
|
%
|
|
|
2,050,131
|
|
100
|
%
|
|
3.50
|
%
|
|
|
1,821,176
|
|
100
|
%
|
|
3.02
|
%
|
|
|
|
Short-term borrowings
|
|
149,016
|
|
|
|
|
2.89
|
%
|
|
|
136,731
|
|
|
|
|
5.16
|
%
|
|
|
66,139
|
|
|
|
|
5.07
|
%
|
|
Long-term
borrowings
(1)
|
|
151,743
|
|
|
|
|
4.50
|
%
|
|
|
113,748
|
|
|
|
|
5.61
|
%
|
|
|
104,651
|
|
|
|
|
5.39
|
%
|
|
Total borrowings
|
|
300,759
|
|
|
|
|
3.71
|
%
|
|
|
250,479
|
|
|
|
|
5.36
|
%
|
|
|
170,790
|
|
|
|
|
5.27
|
%
|
|
Total deposits
and borrowings
|
$
|
2,346,684
|
|
|
|
|
2.60
|
%
|
|
$
|
2,300,610
|
|
|
|
|
3.76
|
%
|
|
$
|
1,991,966
|
|
|
|
|
3.27
|
%
|
|
(1)
|
|
Long-term borrowings include junior subordinated
debentures.
|
Average
total deposits and the mix in average deposit balances by deposit category in
2008 remained relatively consistent with 2007. The important average noninterest
bearing demand category represented 23% of total deposits, consistent with the
prior year. The 2008 average rate paid on deposits declined 1.12% from 2007
primarily due to lower market interest rates. Looking forward, we intend to
price our deposit products competitively in connection with our efforts to
maintain and grow our strong relationship deposit base. Whether we will be
successful maintaining and growing our low cost deposit base will depend on
various factors, including deposit pricing, client behavior, and our success in
competing for deposits in uncertain economic and market conditions.
Average 2008 borrowings increased
20% or $50 million from 2007 largely as a result of higher borrowings from the
Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”). Such
borrowings were competitively priced relative to interest bearing deposits,
including certificates of deposit.
Our combined deposit and borrowing
cost decreased 1.16% since 2007, primarily reflecting the decline in short-term
market interest rates over the past year.
The average balance of junior
subordinated debentures in 2008 was $51 million, or flat with 2007. For
additional detail regarding Bancorp’s outstanding junior subordinated
debentures, see Note 11 “Junior Subordinated Debentures” to the Company’s
audited financial statements included under “Financial Statements and
Supplementary Data” in Item 8 of this report, and under the heading “Liquidity
and Sources of Funds” in Item 7 of this report below.
50
As of December 31, 2008, time
deposits are presented below at the earlier of the next repricing date or
maturity:
|
|
|
Time
Deposits
|
|
|
|
|
|
|
(Dollars in
thousands)
|
of $100,000 or More
|
|
Other Time Deposits
|
|
Total Time Deposits
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
Reprice/mature in 3 months or less
|
$
|
162,664
|
|
56.1
|
%
|
|
$
|
73,891
|
|
25.1
|
%
|
|
$
|
236,555
|
|
40.5
|
%
|
|
|
Reprice/mature
after 3 months through 6 months
|
|
48,967
|
|
16.9
|
%
|
|
|
62,422
|
|
21.2
|
%
|
|
|
111,389
|
|
19.1
|
%
|
|
|
Reprice/mature after 6 months through one year
|
|
58,452
|
|
20.1
|
%
|
|
|
115,702
|
|
39.3
|
%
|
|
|
174,154
|
|
29.8
|
%
|
|
|
Reprice/mature
after one year through five years
|
|
19,925
|
|
6.9
|
%
|
|
|
42,250
|
|
14.4
|
%
|
|
|
62,175
|
|
10.6
|
%
|
|
|
Reprice/mature after five years
|
|
-
|
|
0.0
|
%
|
|
|
20
|
|
0.0
|
%
|
|
|
20
|
|
0.0
|
%
|
|
|
Total
|
$
|
290,008
|
|
100.0
|
%
|
|
$
|
294,285
|
|
100.0
|
%
|
|
$
|
584,293
|
|
100.0
|
%
|
Over 90% of our time deposits will
mature and reprice in the next 12 months. In the short term, time deposits may
have limited impact on the liquidity of the Company. Historically time deposits
generally have been retained and/or expanded with increases in rates paid, which
increase our funding cost. The level of time deposits in the future depends on
customer preferences for time deposits, the level of FDIC insurance available
for time deposits, our need for deposit funding volume, customer perceptions of
the Bank, as well as the pricing required to retain and attract time deposits
relative to other funding alternatives including borrowings from FHLB.
|
|
|
December 31,
|
|
December 31,
|
|
|
(Dollars in
thousands)
|
2008
|
|
2007
|
|
|
Time deposits less than $100,000
|
$
|
294,285
|
|
50
|
%
|
|
$
|
263,185
|
|
48
|
%
|
|
|
Time deposits
$100,000 to $250,000
|
|
130,107
|
|
22
|
%
|
|
|
141,666
|
|
26
|
%
|
|
|
Time deposits greater than $250,000
|
|
159,901
|
|
28
|
%
|
|
|
145,414
|
|
26
|
%
|
|
|
Total Time Deposits
|
$
|
584,293
|
|
100
|
%
|
|
$
|
550,265
|
|
100
|
%
|
As shown
above, time deposits of $100,000 or more represented approximately half of total
time deposits at year end 2008, up from 48% at December 31, 2007. The time
deposits less than $100,000 increased during 2008 due to FDIC coverage in this
segment and the Company’s participation in the Certificate of Deposit Account
Registry Service (“CDARS”) network. At December 31, 2008, we did not have any
brokered deposits outside of the $71.0 million in CDARS balances.
As of
December 31, 2008, long-term and short-term borrowings through FHLB had the
following terms remaining to their contractual maturities:
|
|
(Dollars in
thousands)
|
Due in
three
|
|
three
months
|
|
Due
after one year
|
|
Due
after
|
|
|
|
|
|
months or less
|
|
through one year
|
|
through five years
|
|
five years
|
|
Total
|
|
|
Short-term borrowings
|
$
|
97,000
|
|
$
|
35,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
132,000
|
|
|
Long-term
borrowings
(1)
|
|
-
|
|
|
-
|
|
|
91,059
|
|
|
-
|
|
|
91,059
|
|
|
Total borrowings
|
$
|
97,000
|
|
$
|
35,000
|
|
$
|
91,059
|
|
$
|
-
|
|
$
|
223,059
|
|
(1)
|
|
Based on contractual maturities and may vary based on
call dates.
|
Deposit growth remains a key
strategic focus for us and our ability to achieve deposit growth, particularly
growth in core deposits, is subject to many risk factors including the effects
of competitive pricing pressure, changing customer deposit behavior, regulatory
changes, and consumer’s evaluation of bank stability and increasing or
decreasing interest rate environments. Adverse developments with respect to any
of these risk factors could limit our ability to attract and retain deposits. We
may consider taking brokered deposits in the future if management determines
that is appropriate to maintain or grow our deposit funding base.
51
Capital Resources
The following table summarizes the consolidated risk based capital ratios
of Bancorp and the Bank at December 31, 2008, and December 31, 2007:
|
|
December 31, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
Amount
|
|
Minimum
|
|
|
|
|
|
Amount
|
|
Minimum
|
|
|
|
|
|
|
Required For
|
|
percent
|
|
|
|
|
|
Required For
|
|
percent
|
|
|
|
|
|
|
Well
|
|
required for
|
|
|
|
|
|
Well
|
|
required
|
|
|
|
|
|
|
Capitalized
|
|
Well
|
|
|
|
|
|
Capitalized
|
|
Well
|
|
(Dollars in
thousands)
|
Actual Amount
|
|
Ratio
|
|
Status
|
|
Capitalized
|
|
Actual Amount
|
|
Ratio
|
|
Status
|
|
Capitalized
|
|
Tier 1 capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stockholders’ equity
|
$
|
198,187
|
|
|
|
|
|
|
|
|
|
|
$
|
208,241
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying capital securities
|
|
51,000
|
|
|
|
|
|
|
|
|
|
|
|
51,000
|
|
|
|
|
|
|
|
|
|
|
|
Less: Goodwill
and intangibles
|
|
14,054
|
|
|
|
|
|
|
|
|
|
|
|
14,491
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments
|
|
1,468
|
|
|
|
|
|
|
|
|
|
|
|
(585
|
)
|
|
|
|
|
|
|
|
|
|
|
West Coast
Bancorp total tier 1 capital
|
$
|
236,601
|
|
9.96
|
%
|
|
$
|
142,523
|
|
6
|
%
|
|
$
|
244,165
|
|
|
9.88
|
%
|
|
$
|
148,206
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stockholders’ equity
|
$
|
241,701
|
|
|
|
|
|
|
|
|
|
|
$
|
244,047
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying
capital securities
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Less: Goodwill and intangibles
|
|
14,054
|
|
|
|
|
|
|
|
|
|
|
|
14,491
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
(580
|
)
|
|
|
|
|
|
|
|
|
|
|
West Coast Bank total tier 1 capital
|
$
|
229,166
|
|
9.66
|
%
|
|
$
|
142,367
|
|
6
|
%
|
|
$
|
228,976
|
|
|
9.28
|
%
|
|
$
|
148,030
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 2 capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses allowed
|
$
|
29,695
|
|
|
|
|
|
|
|
|
|
|
$
|
31,141
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bancorp total tier 2 capital
|
$
|
29,695
|
|
|
|
|
|
|
|
|
|
|
$
|
31,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses allowed
|
$
|
29,663
|
|
|
|
|
|
|
|
|
|
|
$
|
31,104
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
Bank total tier 2 capital
|
$
|
29,663
|
|
|
|
|
|
|
|
|
|
|
$
|
31,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
Bancorp
|
$
|
266,296
|
|
11.21
|
%
|
|
$
|
237,538
|
|
10
|
%
|
|
$
|
275,306
|
|
|
11.15
|
%
|
|
$
|
247,010
|
|
10
|
%
|
|
West Coast Bank
|
|
258,829
|
|
10.91
|
%
|
|
|
237,278
|
|
10
|
%
|
|
|
260,080
|
|
|
10.54
|
%
|
|
|
246,717
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bancorp
|
$
|
236,601
|
|
9.46
|
%
|
|
$
|
125,058
|
|
5
|
%
|
|
$
|
244,165
|
|
|
9.41
|
%
|
|
$
|
129,759
|
|
5
|
%
|
|
West Coast Bank
|
|
229,166
|
|
9.17
|
%
|
|
|
124,910
|
|
5
|
%
|
|
|
228,976
|
|
|
8.83
|
%
|
|
|
129,714
|
|
5
|
%
|
|
|
|
Risk weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted
assets on balance sheet
|
$
|
2,233,791
|
|
|
|
|
|
|
|
|
|
|
$
|
2,309,966
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets off balance sheet exposure
|
|
155,877
|
|
|
|
|
|
|
|
|
|
|
|
195,781
|
|
|
|
|
|
|
|
|
|
|
|
Less: Goodwill
and intangibles
|
|
14,054
|
|
|
|
|
|
|
|
|
|
|
|
14,491
|
|
|
|
|
|
|
|
|
|
|
|
Less: Disallowed allowance for credit losses
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
21,159
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bancorp risk weighted assets
|
$
|
2,375,375
|
|
|
|
|
|
|
|
|
|
|
$
|
2,470,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets on balance sheet
|
$
|
2,231,228
|
|
|
|
|
|
|
|
|
|
|
$
|
2,307,070
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets off balance sheet exposure
|
|
155,877
|
|
|
|
|
|
|
|
|
|
|
|
195,781
|
|
|
|
|
|
|
|
|
|
|
|
Less: Goodwill and intangibles
|
|
14,054
|
|
|
|
|
|
|
|
|
|
|
|
14,491
|
|
|
|
|
|
|
|
|
|
|
|
Less: Disallowed allowance for credit losses
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
21,195
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bank total risk weighted assets
|
$
|
2,372,780
|
|
|
|
|
|
|
|
|
|
|
$
|
2,467,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bancorp
|
$
|
2,501,151
|
|
|
|
|
|
|
|
|
|
|
$
|
2,595,174
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bank
|
|
2,498,199
|
|
|
|
|
|
|
|
|
|
|
|
2,594,280
|
|
|
|
|
|
|
|
|
|
|
52
The FRB
and the FDIC have established minimum requirements for capital adequacy for bank
holding companies and state non-member banks. For more information on this
topic, see “Capital Adequacy” in Item 1 of this report above. As of December 31,
2008, Bancorp and the Bank are considered “Well Capitalized” under the
regulatory risk based capital guidelines.
Bancorp’s
stockholders’ equity was $198 million at December 31, 2008, down from $208
million at December 31, 2007. Nonetheless, the total capital ratio at the Bank
improved to 10.91% at December 31, 2008, from 10.54% at December 31, 2007, while
Bank Tier 1 capital increased from 9.28% to 9.66% over the same period. The
Company increased its capital ratios at December 31, 2008, from year end 2007
mainly as a result of the declining risk weighted assets during 2008.
The
Company closely monitors and manages its capital position. During 2008, the
Company reduced its quarterly cash dividend to shareholders to $.01 per share as
part of its efforts to preserve capital. In the fourth quarter 2008, the holding
company contributed $9.8 million to the Bank related to a tax benefit of the
holding company which enhanced the Bank’s capital position. The Company has and
may also continue to preserve capital by slowing new loan commitments,
participating out additional loans, selling assets, including loans, to reduce
its risk weighted assets or eliminate the quarterly shareholder cash dividend
all together. The degree to which and the duration of time during which the
Company may take steps to preserve and increase its capital will depend on
various factors including general economic and real estate market conditions in
our service areas, its ability to raise additional capital, regulatory
considerations, the level of consumer confidence in our institution and the
banking sector generally, and the Company’s ability to manage and limit the
adverse effects of losses on existing loans.
Bancorp
may also take steps to raise additional capital. To do so, Bancorp may offer and
issue equity, hybrid equity or debt instruments, including convertible preferred
stock or subordinated debt. Furthermore, the Company may participate in any
government programs that become available to it. Any equity or debt financing,
if available at all, may not be available on terms that are favorable to current
shareholders or even acceptable to the Company.
The risk
based capital ratios of Bancorp include $51 million of trust preferred
securities that qualify as Tier 1 capital at December 31, 2008, under guidance
issued by the Board of Governors of the Federal Reserve System. Bancorp expects
to continue to rely on common equity and trust preferred securities to remain
well capitalized, although it does not expect to issue additional trust
preferred securities in the near term due to current market
conditions.
In July 2000, the
Company announced a stock repurchase program that has been expanded several
times, most recently by 1.0 million shares in September 2007. Under this plan,
the Company can purchase up to 4.88 million shares of the Company’s common
stock, including completed purchases. There were no shares repurchased under
this plan during 2008, and we do not anticipate any share repurchases in 2009.
The following table presents
information with respect to Bancorp’s stock repurchase program:
|
|
|
Shares
repurchased
|
|
Cost
of shares
|
|
Average cost per
|
|
|
(Shares and
dollars in thousands)
|
in period
|
|
repurchased
|
|
share
|
|
|
Prior to year ended 2006
|
3,623
|
|
|
60,503
|
|
|
16.70
|
|
|
Year ended
2007
|
205
|
|
|
5,847
|
|
|
28.52
|
|
|
Year ended 2008
|
-
|
|
|
-
|
|
|
-
|
|
|
Plan to
date total
|
3,828
|
|
$
|
66,350
|
|
$
|
17.33
|
53
Liquidity and Sources of Funds
The
Bank’s primary sources of funds are customer deposits, maturities of investment
securities, sales of “Available for Sale” securities, loan sales, loan
repayments, advances from the FHLB, loans taken out at the Federal Reserve
discount window, and the use of Federal Funds markets. Scheduled loan repayments
are a relatively stable source of funds in normal economic conditions, while
deposit inflows and unscheduled loan prepayments are not. Other deposit inflows
and unscheduled loan prepayments are influenced by general interest rate levels,
interest rates available on other investments, competition, economic conditions,
availability of financing and other factors. In addition, government programs,
such as the FDIC’s Transaction Account Guarantee Program (one of the two primary
components of the TLGP), may influence deposit behaviors.
Deposits
are the primary source of new funds. Total deposits were $2.0 billion at
December 31, 2008, down from $2.1 billion at December 31, 2007. Under the TLGP,
effective October 14, 2008 through December 31, 2009, all noninterest-bearing
transaction accounts, IOLTA accounts, and certain NOW accounts are fully
guaranteed by the FDIC for the entire amount in the account. The Bank
participates in this program at an additional cost to the Bank. Deposits
maintained at the Bank are insured by the FDIC up to $250,000 per account owner
through December 31, 2009. On January 1, 2010, the standard coverage limits are
scheduled to return to $100,000 for all deposit categories except Individual
Retirement Accounts and certain other retirement accounts, which will continue
to be insured up to $250,000 per account owner.
The Bank
participates in the Certificate of Deposit Account Registry Service (“CDARS”)
offered by Promontory Interfinancial Network. The CDARS program allows the Bank
to accept deposits in excess of the FDIC insurance limits for that depositor and
obtain “pass-through” insurance for the total deposit by placing the depositor’s
funds in certificates of deposits at as many separate FDIC-insured institutions
as necessary so that no institution holds deposits exceeding the FDIC insurance
limit for that depositor. The Bank acts as custodian for the depositor with
respect to certificates issued to the depositor by participating institutions.
In reciprocal CDARS transactions the Bank, in turn, issues certificates to
depositors for funds originally deposited at other participating institutions.
CDARS enhances our ability to attract and retain customers and increase deposit
balances. The Bank’s reciprocal CDARS balance was $71.0 million at December 31,
2008, compared to $7.3 million at December 31, 2007 and $85.0 million at
September 30, 2008. With news of bank failures and increased levels of distress
in the financial services industry and growing customer concern with FDIC
insurance limits, customer interest in and demand for CDARS deposits increased
before leveling off in the fourth quarter of 2008. There can be no assurance
that CDARS deposits will be available for the Company to offer its customers in
the future.
CDARS
certificates of deposits issued by the Bank to depositors for funds originally
deposited at other participating institutions are considered “brokered deposits”
by regulatory agencies, however at December 31, 2008, the Bank did not have any
other forms of deposits considered brokered deposits. The Bank expects to
utilize brokered deposits outside the CDARS program in the future.
The Bank
is evaluating participation in the FDIC Debt Guarantee Program, which is the
other primary component of the TLGP. Under this program, the Bank may issue or
participate in a pooled issuance of debt guaranteed by the FDIC under certain
circumstances. In the event it does issue such guaranteed debt, upon the failure
of the Bank to make a timely payment of principal or interest under an
FDIC-guaranteed senior unsecured debt instrument issued between October 14,
2008, and October 2009, the FDIC would pay the unpaid principal and interest,
subject to certain regulatory conditions, disclosure requirements, and debt
guarantee limits. At this point, it is anticipated that the debt guarantee will
not extend beyond June 30, 2012. The Bank expects to issue debt under the TLGP
in 2009 as part of its liquidity strategy. Depending on liquidity needs, we may
issue up to approximately $46 million in debt under the TLGP.
At
December 31, 2008, the Bank had outstanding borrowings of $223 million against
its $502 million in established borrowing capacity with the FHLB. The Bank’s
borrowing facility is subject to collateral and stock ownership requirements, as
well as prior FHLB consent to each advance. The Bank also had Federal Funds line
of credit agreements with correspondent financial institutions of $25 million at
December 31, 2008. The use of such Federal Funds lines is subject to certain
conditions. Additionally, at December 31, 2008, the Bank had an available
discount window credit line with the FRB of approximately $30 million with no
balance outstanding. Subsequent to December 31, 2008, the Bank received FRB
approval to pledge additional collateral types to support this line resulting in
an estimated $100 million in additional available borrowing capacity. As with
the other lines, each advance under the credit arrangement with FRB is subject
to prior FRB consent. For additional detail regarding Bancorp’s outstanding
borrowings, see Note 10 “Borrowings” to the Company’s audited financial
statements included under “Financial Statements and Supplementary Data” in Item
8 of this report.
54
The
holding company is a separate entity from the Bank and must provide for its own
liquidity. As of December 31, 2008, the holding company did not have any
borrowing arrangements of its own. The holding company primarily relies on
dividends from the Bank and proceeds from the issuance of trust preferred
securities for its liquidity, which is used for various corporate purposes,
including dividends, interest payments on its junior subordinated debentures,
stock repurchases and operating expenses. Trust preferred securities have
historically been an important source of additional liquidity and regulatory
capital for the holding company, although given the current market conditions,
trust preferred securities are not expected to be a source of liquidity for the
Company in 2009. Accordingly, the holding company expects to rely primarily on
dividends from the Bank to meet liquidity requirements in 2009. There are
statutory and regulatory limitations on the Bank’s ability to pay dividends to
the holding company. Based on information available to management at this time,
we do not believe these restrictions will have an adverse impact on the ability
of the holding company to meet its liquidity requirements in the near term, which
primarily include the debt service requirements on the $51 million of junior
subordinated debentures it has issued and outstanding.
At
December 31, 2008, six wholly-owned subsidiary grantor trusts established by
Bancorp had issued and sold $51.0 million of pooled trust preferred securities
that remain outstanding. Trust preferred securities accrue and pay distributions
periodically at specified annual rates as provided in each indenture. The trusts
used all of the net proceeds from each sale of trust preferred securities to
purchase a like amount of junior subordinated debentures (the “Debentures”) of
the Company. The Debentures are the sole assets of the trusts. The Company’s
obligations under the Debentures and related documents, taken together,
constitute a full and unconditional guarantee by the Company of the obligations
of the trusts. The trust preferred securities are mandatorily redeemable upon
the maturity of the Debentures and may be subject to earlier redemption as
provided in the indentures. The Company has the right to redeem the Debentures
in whole (but not in part) on or after specific dates, at a redemption price
specified in the indentures plus any accrued but unpaid interest to the
redemption date.
The
following table is a summary of outstanding trust preferred securities at
December 31, 2008:
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred security
|
|
|
|
|
|
Rate
at
|
|
|
|
Next
possible
|
|
Issuance Trust
|
|
Issuance date
|
|
amount
|
|
Rate type
(1)
|
|
Initial rate
|
|
12/31/08
|
|
Maturity date
|
|
redemption date
|
|
West Coast Statutory Trust III
|
|
September 2003
|
|
$
|
7,500
|
|
Variable
|
|
6.75
|
%
|
|
4.82
|
%
|
|
September 2033
|
|
September 2013
|
|
West Coast
Statutory Trust IV
|
|
March
2004
|
|
$
|
6,000
|
|
Fixed
|
|
5.88
|
%
|
|
5.88
|
%
|
|
March
2034
|
|
March
2009
|
|
West Coast Statutory Trust V
|
|
April 2006
|
|
$
|
15,000
|
|
Variable
|
|
6.79
|
%
|
|
3.43
|
%
|
|
June 2036
|
|
June 2011
|
|
West Coast
Statutory Trust VI
|
|
December
2006
|
|
$
|
5,000
|
|
Variable
|
|
7.04
|
%
|
|
3.68
|
%
|
|
December
2036
|
|
December
2011
|
|
West Coast Statutory Trust VII
|
|
March 2007
|
|
$
|
12,500
|
|
Variable
|
|
6.90
|
%
|
|
3.55
|
%
|
|
March 2037
|
|
March 2012
|
|
West Coast
Statutory Trust VIII
|
|
June
2007
|
|
$
|
5,000
|
|
Variable
|
|
6.74
|
%
|
|
3.38
|
%
|
|
June
2037
|
|
June
2012
|
|
|
|
Total
|
|
$
|
51,000
|
|
|
|
Weighted rate
|
|
3.97
|
%
|
|
|
|
|
|
(1)
|
|
The variable rate preferred securities reprice
quarterly.
|
The interest rates on all issued
trust preferred securities, other than the $6 million issued in March 2004 reset
quarterly and are tied to the London Interbank Offered Rate (“LIBOR”) rate.
There were no purchases, redemptions or maturities of trust preferred securities
in 2008. For additional information regarding trust preferred securities, see
Note 11 “Junior Subordinated Debentures” to the Company’s audited financial
statements included under “Financial Statements and Supplementary Data” in Item
8 of this report.
Management expects to continue relying on customer deposits, cash flow
from investment securities, sales of “Available for Sale” securities, loan
sales, loan repayments, advances from the FHLB, the Federal Reserve discount
window, federal fund lines and other borrowings to provide liquidity. Other
potential sources of funds include lines of credit with correspondent banking
partners and brokered time deposits. Although deposit balances at times have
shown historical growth, such balances may be influenced by changes in the
financial services industry, regulatory changes, interest rates available on
other investments, changes in consumer confidence in depository institutions or
the Bank specifically, general economic conditions, competition, customer
management of cash resources and other factors. Borrowings may be used on a
short-term and long-term basis to compensate for reductions in other sources of
funds. Borrowings may also be used on a long-term basis to support expanded
lending activities and to match maturities, duration, or repricing intervals of
assets. See “Risk Factors” in Item 1A of this report above.
55
Off Balance Sheet Arrangements
At
December 31, 2008, the Bank had commitments to extend credit of $710 million, or
down 26% compared to $962 million at December 31, 2007. For additional
information regarding off balance sheet arrangements and future financial
commitments, see Note 23 “Financial Instruments with Off Balance Sheet Risk” to
the Company’s audited financial statements included under “Financial Statements
and Supplementary Data” in Item 8 of this report. We are party to many
contractual financial obligations, including repayment of borrowings, operating
lease payments and commitments to extend credit.
The table
below presents certain future financial obligations including payments required
under retirement plans which are included in “Other long-term liabilities”
below:
|
|
|
|
Payments due within time period at
December 31, 2008
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Due
After Five
|
|
|
|
|
|
|
|
0-12 Months
|
|
1-3 Years
|
|
4-5 Years
|
|
Years
|
|
Total
|
|
|
Operating leases
(1)
|
|
$
|
3,802
|
|
$
|
6,775
|
|
$
|
6,161
|
|
$
|
10,256
|
|
$
|
26,994
|
|
|
Junior
subordinated debentures
(2) (3)
|
|
|
2,024
|
|
|
4,048
|
|
|
4,048
|
|
|
95,192
|
|
|
105,312
|
|
|
Long-term borrowings
(3)
|
|
|
3,936
|
|
|
69,859
|
|
|
28,078
|
|
|
-
|
|
|
101,873
|
|
|
Other long-term
liabilities
|
|
|
220
|
|
|
526
|
|
|
334
|
|
|
668
|
|
|
1,748
|
|
|
Total
|
|
$
|
9,982
|
|
$
|
81,208
|
|
$
|
38,621
|
|
$
|
106,116
|
|
$
|
235,927
|
|
(1)
|
|
Operating leases do not include increases in common area
charges.
|
|
(2)
|
|
Junior subordinated debenture obligations reflect
contractual maturities which are 30 years from origination and do not
reflect possible call dates.
|
|
(3)
|
|
Long-term borrowings and junior subordinated debenture
obligations reflect interest payment obligations based on December 31,
2008 contractual interest rates.
|
56
ITEM 7A.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Interest rate,
credit and operations risks are the most significant market risks impacting our
performance. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of our business
activities. We rely on loan reviews, prudent loan underwriting standards and an
adequate allowance for credit losses to attempt to mitigate credit risk.
Interest rate risk is reviewed at least quarterly by the Asset Liability
Management Committee (“ALCO”) which includes senior management representatives.
The ALCO manages our balance sheet to maintain net interest income and present
value of equity within acceptable ranges despite unforeseeable changes in
interest rates.
Asset/liability management simulation models are used to measure interest
rate risk. The models quantify interest rate risk by simulating forecasted net
interest income over a 12-month time horizon under various rate scenarios, as
well as monitoring the change in the present value of equity under the same rate
scenarios. The present value of equity is defined as the difference between the
market value of current assets less current liabilities. By measuring the change
in the present value of equity under different rate scenarios, management can
identify interest rate risk that may not be evident in simulating changes in
forecasted net interest income. Readers are referred to the sections, “Forward
Looking Statement Disclosure” and “Risk Factors” of this report in connection
with this discussion of market risks.
The following tables show the approximate percentage changes in
forecasted net interest income over a 12-month period and in the present value
of equity under several rate scenarios. For the net interest income analysis,
three rate scenarios provided by IHS Global Insight, an outside economic
service, are compared to a stable (flat) rate scenario:
|
|
|
Actual
rates
|
Base Case
|
Falling
Rates
|
Rising
Rates
|
|
|
|
December 31,
2008
|
2009
(average)
|
2009
(average)
|
2009
(average)
|
|
|
Federal Funds Rate
|
.25%
|
.125%
|
.01%
|
1.29%
|
|
|
Prime Rate
|
3.25%
|
3.25%
|
3.02%
|
4.31%
|
|
|
Treasury Yield Curve Spread 10-year to
3 month
|
260 basis
points
|
216 basis
points
|
198 basis
points
|
219 basis
points
|
|
|
Global Insight
Probability
|
|
70%
|
25%
|
5%
|
|
|
Stable rate scenario compared
to:
|
Percent
Change in
|
|
|
|
|
Net Interest
Income
|
|
|
|
Global Insight Rising
|
+.3%
|
|
|
|
Global Insight Base Case
|
+.2%
|
|
|
|
Global Insight Falling
|
-1.0%
|
|
As
illustrated in the above table, at December 31, 2008, we estimate our balance
sheet was relatively neutral over a 12 month horizon, meaning that interest
earning assets mature or reprice at approximately the same rate as
interest-bearing liabilities in a given period. A decrease in market rates of
interest could adversely affect net interest income, while an increase in market
rates may increase net interest income slightly. At December 31, 2007, we
estimated that our balance sheet was slightly asset sensitive. The decline in
construction loans during 2008, which have short-term repricing characteristics,
reduced our asset sensitivity. We attempt to limit our interest rate risk
through managing the repricing characteristics of our assets and liabilities.
For the
present value of equity analysis, the results are compared to the net present
value of equity using the yield curve as of December 31, 2008. This curve is
then shifted up and down and the net present value of equity is computed. This
table does not include flattening or steepening yield curve effects.
|
|
December 31, 2008
|
Percent Change in
|
|
|
|
Change in Interest Rates
|
Present Value of Equity
|
|
|
|
Up 200 basis points
|
2.2%
|
|
|
|
Up 100 basis points
|
.2%
|
|
|
|
Down 100 basis points
|
-.2%
|
|
As indicated in the table
above, the results of the present value of equity analysis are consistent with
the net interest income simulation results showing that our balance sheet is
relatively neutral.
It should
be noted that the simulation model does not take into account future management
actions that could be undertaken, should a change occur in actual market
interest rates during the year. Also, certain assumptions are required to
perform modeling simulations that may have a significant impact on the results.
These include important assumptions regarding the level of interest rates and
balance changes on deposit products that do not have stated maturities, as well
as the relationship between loan yields and deposit rates relative to market
interest rates. These assumptions have been developed through a combination of
industry standards and future expected pricing behavior but could be
significantly influenced by future competitor pricing behavior. The model also
includes assumptions about changes in the composition or mix of the balance
sheet. The results derived from the simulation model could vary significantly
due to external factors such as changes in the prepayment assumptions, early
withdrawals of deposits and competition. Any merger activity will also have an
impact on the asset/liability position as new assets are acquired and added.
57
Interest Rate Sensitivity (Gap)
Table
The primary objective of our asset/liability management is to maximize
net interest income while maintaining acceptable levels of interest-rate
sensitivity. We seek to meet this objective through influencing the maturity and
repricing characteristics of our assets and liabilities.
The following
table sets forth the estimated maturity and repricing and the resulting interest
rate gap between interest earning assets and interest bearing liabilities at
December 31, 2008. The amounts in the table are derived from internal Bank data
regarding maturities and next repricing dates including contractual repayments.
|
|
|
|
Estimated Maturity or Repricing at
December 31, 2008
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
After Five
|
|
|
|
|
|
|
|
|
0-3 Months
|
|
4-12 Months
|
|
1-5 Years
|
|
Years
|
|
Total
|
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning balances due from banks
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
|
Federal funds
sold
|
|
|
6,682
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,682
|
|
|
|
Trading assets
|
|
|
1,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,546
|
|
|
|
Investments available for
sale
(1)(2)
|
|
|
18,564
|
|
|
|
21,685
|
|
|
|
60,257
|
|
|
|
98,009
|
|
|
|
198,515
|
|
|
|
Loans held for sale
|
|
|
2,860
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,860
|
|
|
|
Loans, including fees
|
|
|
931,522
|
|
|
|
307,944
|
|
|
|
762,979
|
|
|
|
62,351
|
|
|
|
2,064,796
|
|
|
|
Total interest earning assets
|
|
$
|
961,224
|
|
|
$
|
329,629
|
|
|
$
|
823,236
|
|
|
$
|
160,360
|
|
|
|
2,274,449
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,920
|
)
|
|
|
Cash and due from banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,046
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,565
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,516,140
|
|
|
|
|
|
|
Interest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, interest bearing demand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and money markets
(3)
|
|
$
|
105,294
|
|
|
$
|
247,393
|
|
|
$
|
319,358
|
|
|
$
|
289,749
|
|
|
$
|
961,794
|
|
|
|
Time deposits
|
|
|
236,133
|
|
|
|
285,889
|
|
|
|
62,251
|
|
|
|
20
|
|
|
|
584,293
|
|
|
|
Borrowings
(2)
|
|
|
97,000
|
|
|
|
35,000
|
|
|
|
91,059
|
|
|
|
-
|
|
|
|
223,059
|
|
|
|
Junior subordinated debentures
|
|
|
51,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,000
|
|
|
|
Total interest bearing liabilities
|
|
$
|
489,427
|
|
|
$
|
568,282
|
|
|
$
|
472,668
|
|
|
$
|
289,769
|
|
|
|
1,820,146
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497,807
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,317,953
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198,187
|
|
|
|
Total liabilities & stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,516,140
|
|
|
|
|
|
|
Interest sensitivity gap
|
|
$
|
471,797
|
|
|
$
|
(238,653
|
)
|
|
$
|
350,568
|
|
|
$
|
(129,409
|
)
|
|
$
|
454,303
|
|
|
|
Cumulative interest sensitivity gap
|
|
$
|
471,797
|
|
|
$
|
233,144
|
|
|
$
|
583,712
|
|
|
$
|
454,303
|
|
|
|
|
|
|
|
Cumulative interest sensitivity gap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as a percentage of total assets
|
|
|
19
|
%
|
|
|
9
|
%
|
|
|
23
|
%
|
|
|
18
|
%
|
|
|
|
|
|
(1)
|
|
Equity investments have been placed in the 0-3 month
category.
|
|
(2)
|
|
Repricing is based on anticipated call dates and may
vary from contractual maturities.
|
|
(3)
|
|
Repricing is based on estimated average
lives.
|
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities and periods of repricing, they may react differently to
changes in market interest rates. Also, interest rates on assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other assets and liabilities may follow changes in market interest
rates. Given these shortcomings, management believes that rate risk is best
measured by simulation modeling as opposed to measuring interest rate risk
through interest rate gap measurement.
58
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The following audited consolidated financial statements and
related documents are set forth in this Annual Report on Form 10-K on the pages
indicated:
|
Report of Independent Registered Public Accounting
Firm
|
60
|
|
Consolidated
Balance Sheets
|
61
|
|
Consolidated Statements of Income
|
62
|
|
Consolidated
Statements of Cash Flows
|
63
|
|
Consolidated Statements of Changes in Stockholders’
Equity
|
64
|
|
Notes to
Consolidated Financial Statements
|
65
|
59
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
West Coast Bancorp
Lake Oswego, Oregon
We have audited the accompanying
consolidated balance sheets of West Coast Bancorp and subsidiaries (the
“Company”) as of December 31, 2008 and 2007, and the related consolidated
statements of income (loss), changes in stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial
position of West Coast Bancorp and subsidiaries as of December 31, 2008 and
2007, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December
31, 2008, based on the criteria established in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 23, 2009 expressed an unqualified opinion on the
Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
February 23, 2009
60
WEST COAST BANCORP
CONSOLIDATED
BALANCE SHEETS
|
As of December 31 (Dollars in
thousands)
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
58,046
|
|
|
$
|
81,666
|
|
|
Federal funds sold
|
|
|
6,682
|
|
|
|
31,512
|
|
|
Interest-bearing deposits in other banks
|
|
|
50
|
|
|
|
624
|
|
|
Total cash and cash equivalents
|
|
|
64,778
|
|
|
|
113,802
|
|
|
Trading
securities
|
|
|
1,546
|
|
|
|
1,582
|
|
|
Investment securities available for sale, at fair
value
|
|
|
|
|
|
|
|
|
|
(amortized cost: $201,150 and $259,844, respectively)
|
|
|
198,515
|
|
|
|
259,130
|
|
|
Federal Home
Loan Bank stock held at cost
|
|
|
10,843
|
|
|
|
10,295
|
|
|
Loans held for sale
|
|
|
2,860
|
|
|
|
3,187
|
|
|
Loans
|
|
|
2,064,796
|
|
|
|
2,172,669
|
|
|
Allowance for loan losses
|
|
|
(28,920
|
)
|
|
|
(46,917
|
)
|
|
Loans, net
|
|
|
2,035,876
|
|
|
|
2,125,752
|
|
|
Premises and equipment, net
|
|
|
33,127
|
|
|
|
34,733
|
|
|
Other real
estate owned, net
|
|
|
70,110
|
|
|
|
3,255
|
|
|
Goodwill
|
|
|
13,059
|
|
|
|
13,059
|
|
|
Core deposit
intangible, net
|
|
|
995
|
|
|
|
1,432
|
|
|
Bank owned life insurance
|
|
|
23,525
|
|
|
|
22,612
|
|
|
Other
assets
|
|
|
60,906
|
|
|
|
57,775
|
|
|
Total assets
|
|
$
|
2,516,140
|
|
|
$
|
2,646,614
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
478,292
|
|
|
$
|
501,506
|
|
|
Savings and interest bearing
demand
|
|
|
346,206
|
|
|
|
364,971
|
|
|
Money market
|
|
|
615,588
|
|
|
|
678,090
|
|
|
Time deposits
|
|
|
584,293
|
|
|
|
550,265
|
|
|
Total deposits
|
|
|
2,024,379
|
|
|
|
2,094,832
|
|
|
Short-term borrowings
|
|
|
132,000
|
|
|
|
167,000
|
|
|
Long-term
borrowings
|
|
|
91,059
|
|
|
|
83,100
|
|
|
Junior subordinated debentures
|
|
|
51,000
|
|
|
|
51,000
|
|
|
Reserve for
unfunded commitments
|
|
|
1,014
|
|
|
|
7,986
|
|
|
Other liabilities
|
|
|
18,501
|
|
|
|
34,455
|
|
|
Total liabilities
|
|
|
2,317,953
|
|
|
|
2,438,373
|
|
|
|
|
Commitments and contingent liabilities (Notes 12 and
23)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock:
no par value, 10,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common stock: no par value, 50,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
|
issued and outstanding: 15,695,914 in 2008
and 15,592,821 in 2007
|
|
|
92,245
|
|
|
|
89,882
|
|
|
Retained
earnings
|
|
|
107,542
|
|
|
|
118,792
|
|
|
Accumulated other comprehensive loss
|
|
|
(1,600
|
)
|
|
|
(433
|
)
|
|
Total stockholders’ equity
|
|
|
198,187
|
|
|
|
208,241
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
2,516,140
|
|
|
$
|
2,646,614
|
|
See notes to consolidated financial
statements
61
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
|
Year ended December 31 (In thousands,
except per share amounts)
|
|
2008
|
|
2007
|
|
2006
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and
fees on loans
|
|
$
|
129,517
|
|
|
$
|
169,180
|
|
|
$
|
136,193
|
|
|
Interest on taxable investment securities
|
|
|
7,700
|
|
|
|
10,398
|
|
|
|
10,840
|
|
|
Interest on
nontaxable investment securities
|
|
|
3,251
|
|
|
|
3,048
|
|
|
|
2,897
|
|
|
Interest on deposits in other banks
|
|
|
38
|
|
|
|
51
|
|
|
|
109
|
|
|
Interest on
federal funds sold
|
|
|
340
|
|
|
|
513
|
|
|
|
759
|
|
|
Total interest income
|
|
|
140,846
|
|
|
|
183,190
|
|
|
|
150,798
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings,
interest bearing demand deposits and money market
|
|
|
17,174
|
|
|
|
28,958
|
|
|
|
21,795
|
|
|
Time deposits
|
|
|
20,375
|
|
|
|
26,078
|
|
|
|
19,132
|
|
|
Short-term
borrowings
|
|
|
4,312
|
|
|
|
7,057
|
|
|
|
3,356
|
|
|
Long-term borrowings
|
|
|
4,201
|
|
|
|
2,765
|
|
|
|
2,868
|
|
|
Junior
subordinated debentures
|
|
|
2,634
|
|
|
|
3,612
|
|
|
|
2,775
|
|
|
Total interest expense
|
|
|
48,696
|
|
|
|
68,470
|
|
|
|
49,926
|
|
|
Net interest
income
|
|
|
92,150
|
|
|
|
114,720
|
|
|
|
100,872
|
|
|
Provision for credit losses
|
|
|
40,367
|
|
|
|
38,956
|
|
|
|
2,733
|
|
|
Net interest
income after provision for credit losses
|
|
|
51,783
|
|
|
|
75,764
|
|
|
|
98,139
|
|
|
|
|
NONINTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
on deposit accounts
|
|
|
15,547
|
|
|
|
12,932
|
|
|
|
11,096
|
|
|
Payment systems related revenue
|
|
|
9,033
|
|
|
|
8,009
|
|
|
|
6,738
|
|
|
Trust and
investment services revenue
|
|
|
5,413
|
|
|
|
6,390
|
|
|
|
5,480
|
|
|
Gains on sales of loans
|
|
|
2,328
|
|
|
|
3,364
|
|
|
|
2,962
|
|
|
Other real
estate owned sales and valuation adjustments
|
|
|
(5,386
|
)
|
|
|
27
|
|
|
|
14
|
|
|
Other noninterest income
|
|
|
3,252
|
|
|
|
2,843
|
|
|
|
2,492
|
|
|
Loss on
impairment of debt and equity securities
|
|
|
(6,338
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Gain (loss) on sales of securities
|
|
|
780
|
|
|
|
(67
|
)
|
|
|
(686
|
)
|
|
Total noninterest income
|
|
|
24,629
|
|
|
|
33,498
|
|
|
|
28,096
|
|
|
|
|
NONINTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
employee benefits
|
|
|
47,500
|
|
|
|
49,787
|
|
|
|
47,240
|
|
|
Equipment
|
|
|
7,117
|
|
|
|
6,544
|
|
|
|
5,477
|
|
|
Occupancy
|
|
|
9,440
|
|
|
|
8,548
|
|
|
|
7,048
|
|
|
Payment systems related expense
|
|
|
3,622
|
|
|
|
3,143
|
|
|
|
2,378
|
|
|
Professional
fees
|
|
|
4,317
|
|
|
|
2,072
|
|
|
|
2,484
|
|
|
Postage, printing and office supplies
|
|
|
3,834
|
|
|
|
3,896
|
|
|
|
3,558
|
|
|
Marketing
|
|
|
3,583
|
|
|
|
4,524
|
|
|
|
4,967
|
|
|
Communications
|
|
|
1,722
|
|
|
|
1,624
|
|
|
|
1,370
|
|
|
Other
noninterest expense
|
|
|
9,188
|
|
|
|
5,161
|
|
|
|
7,143
|
|
|
Total noninterest expense
|
|
|
90,323
|
|
|
|
85,299
|
|
|
|
81,665
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(13,911
|
)
|
|
|
23,963
|
|
|
|
44,570
|
|
|
PROVISION
(BENEFIT) FOR INCOME TAXES
|
|
|
(7,598
|
)
|
|
|
7,121
|
|
|
|
15,310
|
|
|
NET INCOME (LOSS)
|
|
$
|
(6,313
|
)
|
|
$
|
16,842
|
|
|
$
|
29,260
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.41
|
)
|
|
$
|
1.09
|
|
|
$
|
1.95
|
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.41
|
)
|
|
$
|
1.05
|
|
|
$
|
1.86
|
|
|
|
|
Weighted average common shares
|
|
|
15,472
|
|
|
|
15,507
|
|
|
|
15,038
|
|
|
Weighted average diluted shares
|
|
|
15,472
|
|
|
|
16,045
|
|
|
|
15,730
|
|
See notes to consolidated financial
statements
62
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year ended December 31 (Dollars in
thousands)
|
|
2008
|
|
2007
|
|
2006
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(6,313
|
)
|
|
$
|
16,842
|
|
|
$
|
29,260
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion
|
|
|
4,520
|
|
|
|
4,747
|
|
|
|
3,856
|
|
|
Amortization of tax credits
|
|
|
1,264
|
|
|
|
916
|
|
|
|
847
|
|
|
Deferred income
tax expense
|
|
|
3,811
|
|
|
|
(12,879
|
)
|
|
|
427
|
|
|
Amortization of intangibles
|
|
|
437
|
|
|
|
541
|
|
|
|
435
|
|
|
Provision for
credit losses
|
|
|
40,367
|
|
|
|
38,956
|
|
|
|
2,733
|
|
|
Decrease (increase) in accrued interest receivable
|
|
|
5,535
|
|
|
|
80
|
|
|
|
(4,707
|
)
|
|
Increase in
other assets
|
|
|
(12,268
|
)
|
|
|
(8,880
|
)
|
|
|
(6,931
|
)
|
|
Loss on impairment of securities
|
|
|
6,338
|
|
|
|
-
|
|
|
|
-
|
|
|
(Gain) loss on
sales of securities
|
|
|
(780
|
)
|
|
|
67
|
|
|
|
686
|
|
|
Realized net loss (gain) on derivatives
|
|
|
-
|
|
|
|
34
|
|
|
|
(15
|
)
|
|
Net (gain) loss
on disposal of premises and equipment
|
|
|
14
|
|
|
|
(63
|
)
|
|
|
356
|
|
|
Other real estate owned sales and valuation
adjustments
|
|
|
5,386
|
|
|
|
(27
|
)
|
|
|
(14
|
)
|
|
Gains on sale of
loans
|
|
|
(2,328
|
)
|
|
|
(3,364
|
)
|
|
|
(2,962
|
)
|
|
Origination of loans held for sale
|
|
|
(61,159
|
)
|
|
|
(93,213
|
)
|
|
|
(87,927
|
)
|
|
Proceeds from
sales of loans held for sale
|
|
|
63,814
|
|
|
|
100,976
|
|
|
|
86,523
|
|
|
Increase (decrease) in interest payable
|
|
|
(579
|
)
|
|
|
140
|
|
|
|
770
|
|
|
Increase
(decrease) in other liabilities
|
|
|
(21,151
|
)
|
|
|
13,335
|
|
|
|
2,399
|
|
|
Increase in cash surrender value of bank owned life
insurance
|
|
|
(913
|
)
|
|
|
(894
|
)
|
|
|
(819
|
)
|
|
Stock based
compensation expense
|
|
|
2,865
|
|
|
|
2,030
|
|
|
|
1,641
|
|
|
Excess tax benefit from stock based compensation
|
|
|
-
|
|
|
|
(144
|
)
|
|
|
(214
|
)
|
|
Decrease
(increase) in trading securities
|
|
|
36
|
|
|
|
(507
|
)
|
|
|
(130
|
)
|
|
Net cash provided by operating
activities
|
|
|
28,896
|
|
|
|
58,693
|
|
|
|
26,214
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
maturities of available for sale securities
|
|
|
51,151
|
|
|
|
109,658
|
|
|
|
51,180
|
|
|
Proceeds from sales of available for sale securities
|
|
|
35,033
|
|
|
|
2,718
|
|
|
|
33,163
|
|
|
Purchase of
available for sale securities
|
|
|
(32,854
|
)
|
|
|
(52,961
|
)
|
|
|
(101,725
|
)
|
|
Acquisition, net of cash received
|
|
|
-
|
|
|
|
-
|
|
|
|
6,915
|
|
|
Purchase of
Federal Home Loan Bank stock
|
|
|
(4,849
|
)
|
|
|
(385
|
)
|
|
|
-
|
|
|
Redemption of Federal Home Loan Bank stock
|
|
|
4,301
|
|
|
|
-
|
|
|
|
-
|
|
|
Investments in
tax credits
|
|
|
(476
|
)
|
|
|
(140
|
)
|
|
|
(454
|
)
|
|
Loans made to customers greater than principal collected on
loans
|
|
|
(38,373
|
)
|
|
|
(237,832
|
)
|
|
|
(321,471
|
)
|
|
Purchase of
loans
|
|
|
-
|
|
|
|
(2,203
|
)
|
|
|
-
|
|
|
Proceeds from the sale of other real estate owned
|
|
|
16,969
|
|
|
|
565
|
|
|
|
-
|
|
|
Proceeds from
the sales of premises and equipment
|
|
|
31
|
|
|
|
442
|
|
|
|
619
|
|
|
Capital expenditures on other real estate owned
|
|
|
(1,230
|
)
|
|
|
(57
|
)
|
|
|
-
|
|
|
Capital
expenditures on premises and equipment
|
|
|
(3,124
|
)
|
|
|
(7,645
|
)
|
|
|
(5,864
|
)
|
|
Net cash (used) provided by investing activities
|
|
|
26,579
|
|
|
|
(187,840
|
)
|
|
|
(337,637
|
)
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in demand, savings and interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing transaction
accounts
|
|
|
(104,481
|
)
|
|
|
61,695
|
|
|
|
155,745
|
|
|
Net increase in time deposits
|
|
|
34,028
|
|
|
|
26,785
|
|
|
|
115,598
|
|
|
Proceeds from
issuance of junior subordinated debentures, net of costs
|
|
|
-
|
|
|
|
17,500
|
|
|
|
20,000
|
|
|
Repayment of junior subordinated debentures
|
|
|
-
|
|
|
|
(7,500
|
)
|
|
|
(5,000
|
)
|
|
Proceeds from
issuance of short-term borrowings
|
|
|
2,321,801
|
|
|
|
2,691,498
|
|
|
|
1,161,420
|
|
|
Repayment of short-term borrowings
|
|
|
(2,391,801
|
)
|
|
|
(2,654,916
|
)
|
|
|
(1,100,391
|
)
|
|
Proceeds from
issuance of long-term borrowings
|
|
|
42,959
|
|
|
|
40,100
|
|
|
|
5,400
|
|
|
Repayment of long-term borrowings
|
|
|
-
|
|
|
|
(15,000
|
)
|
|
|
(32,100
|
)
|
|
Repurchase of
common stock
|
|
|
-
|
|
|
|
(5,847
|
)
|
|
|
(2,770
|
)
|
|
Net activity in common stock of deferred compensation
plans
|
|
|
(50
|
)
|
|
|
(84
|
)
|
|
|
(166
|
)
|
|
Proceeds from
issuance of common stock
|
|
|
25
|
|
|
|
2,325
|
|
|
|
4,707
|
|
|
Redemption of common stock related to equity plans
|
|
|
(190
|
)
|
|
|
(639
|
)
|
|
|
(1,082
|
)
|
|
Tax benefit
(expense) associated with equity plans
|
|
|
(287
|
)
|
|
|
853
|
|
|
|
1,875
|
|
|
Excess tax benefit from stock based compensation
|
|
|
-
|
|
|
|
144
|
|
|
|
214
|
|
|
Cash dividends
paid
|
|
|
(6,503
|
)
|
|
|
(7,765
|
)
|
|
|
(6,596
|
)
|
|
Net cash (used) provided by financing
activities
|
|
|
(104,499
|
)
|
|
|
149,149
|
|
|
|
316,854
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(49,024
|
)
|
|
|
20,002
|
|
|
|
5,431
|
|
|
CASH AND CASH
EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
113,802
|
|
|
|
93,800
|
|
|
|
88,369
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
64,778
|
|
|
$
|
113,802
|
|
|
$
|
93,800
|
|
See notes to consolidated financial
statements.
63
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
(Shares and
Dollars in thousands)
|
|
Common Stock
|
|
Retained
|
|
Deferred
|
|
Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Compensation
|
|
Income (loss)
|
|
Total
|
|
BALANCE, January 1, 2006
|
|
14,692
|
|
|
$
|
72,340
|
|
|
$
|
87,611
|
|
|
$
|
(1,773
|
)
|
|
$
|
(1,055
|
)
|
|
$
|
157,123
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
-
|
|
|
|
-
|
|
|
|
29,260
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
29,260
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment/derivative
gains
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
741
|
|
|
|
741
|
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
741
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,001
|
|
|
Cash dividends,
$.45 per common share
|
|
-
|
|
|
|
-
|
|
|
|
(6,919
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,919
|
)
|
|
|
|
Issuance of common stock-stock options
|
|
367
|
|
|
|
4,707
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,707
|
|
|
Redemption of
stock pursuant to stock plans
|
|
(39
|
)
|
|
|
(1,082
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,082
|
)
|
|
Activity in deferred compensation plan
|
|
(5
|
)
|
|
|
(166
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(166
|
)
|
|
Issuance of
common stock-restricted stock
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Transition adjustment for the adoption of SFAS 123(R)
|
|
-
|
|
|
|
(1,773
|
)
|
|
|
-
|
|
|
|
1,773
|
|
|
|
-
|
|
|
|
|
|
|
Issuance of
common stock-acquisition related
|
|
608
|
|
|
|
16,472
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,472
|
|
|
Common stock repurchased and retired
|
|
(95
|
)
|
|
|
(2,770
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,770
|
)
|
|
Stock based
compensation expense
|
|
-
|
|
|
|
1,641
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,641
|
|
|
Tax benefit associated with stock plans
|
|
-
|
|
|
|
1,875
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,875
|
|
|
BALANCE,
December 31, 2006
|
|
15,586
|
|
|
|
91,244
|
|
|
|
109,952
|
|
|
|
-
|
|
|
|
(314
|
)
|
|
|
200,882
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
-
|
|
|
|
-
|
|
|
|
16,842
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
16,842
|
|
|
Other comprehensive income, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment/derivative loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(119
|
)
|
|
|
(119
|
)
|
|
Other comprehensive loss, net of tax
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(119
|
)
|
|
Comprehensive
income
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
16,723
|
|
|
Cash dividends, $.51 per common share
|
|
-
|
|
|
|
-
|
|
|
|
(8,002
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,002
|
)
|
|
|
|
Issuance of common stock-stock options
|
|
162
|
|
|
|
2,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,325
|
|
|
Redemption of
stock pursuant to stock plans
|
|
(22
|
)
|
|
|
(639
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(639
|
)
|
|
Activity in deferred compensation plan
|
|
(2
|
)
|
|
|
(84
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(84
|
)
|
|
Issuance of
common stock-restricted stock
|
|
74
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Common stock repurchased and retired
|
|
(205
|
)
|
|
|
(5,847
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,847
|
)
|
|
Stock based
compensation expense
|
|
-
|
|
|
|
2,030
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,030
|
|
|
Tax benefit associated with stock plans
|
|
-
|
|
|
|
853
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
853
|
|
|
BALANCE,
December 31, 2007
|
|
15,593
|
|
|
|
89,882
|
|
|
|
118,792
|
|
|
|
-
|
|
|
|
(433
|
)
|
|
|
208,241
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
-
|
|
|
|
-
|
|
|
|
(6,313
|
)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
(6,313
|
)
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,167
|
)
|
|
|
(1,167
|
)
|
|
Other comprehensive loss, net of tax
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,167
|
)
|
|
Comprehensive
loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
(7,480
|
)
|
|
Cash dividends, $.29 per common share
|
|
-
|
|
|
|
-
|
|
|
|
(4,550
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,550
|
)
|
|
|
|
Issuance of common stock-stock options
|
|
2
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
Redemption of
stock pursuant to stock plans
|
|
(20
|
)
|
|
|
(190
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(190
|
)
|
|
Activity in deferred compensation plan
|
|
(7
|
)
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
Issuance of
common stock-restricted stock
|
|
128
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Stock based compensation expense
|
|
-
|
|
|
|
2,865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,865
|
|
|
Tax adjustment
associated with stock plans
|
|
-
|
|
|
|
(287
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(287
|
)
|
|
Post retirement benefit adjustment
|
|
-
|
|
|
|
-
|
|
|
|
(387
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(387
|
)
|
|
BALANCE,
December 31, 2008
|
|
15,696
|
|
|
$
|
92,245
|
|
|
$
|
107,542
|
|
|
$
|
-
|
|
|
$
|
(1,600
|
)
|
|
$
|
198,187
|
|
See notes to consolidated financial
statements
64
WEST COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Operations.
West Coast Bancorp (“Bancorp”
or “the Company”) provides a full range of financial services including lending
and depository services through 64 branch banking offices in Oregon and
Washington. West Coast Trust Company, Inc. (“West Coast Trust”) provides
fiduciary, agency, trust and related services, and life insurance products.
Principles of Consolidation.
The
accompanying consolidated financial statements include the accounts of Bancorp,
which operates its wholly-owned subsidiaries, West Coast Bank (the “Bank”), West
Coast Trust and Totten, Inc., after elimination of intercompany transactions and
balances. West Coast Statutory Trusts III, IV, V, VI, VII and VIII are
considered related parties to West Coast Bancorp and their financial results are
not consolidated in West Coast Bancorp’s financial statements. Junior
subordinated debentures issued by the Company to West Coast Statutory Trusts are
included on the Company’s balance sheet as junior subordinated debentures.
Reclassification.
Other real estate
owned (“OREO”) and Federal Home Loan Bank (“FHLB”) stock held at cost have been
reclassified as their own financial statement line items in prior periods to
conform to current presentation in the Company’s consolidated balance
sheet.
Restatements.
Common stock and
additional paid in capital have been combined into one line item labeled common
stock on the Company’s consolidated balance sheets and consolidated statements
of changes in stockholders’ equity for all periods presented, as the common
stock has no par value. In the consolidated statements of cash flows, proceeds
from issuance (repayments of) short-term borrowings and activity related to the
issuance of stock options within cash flows from financing activities had
previously been presented on a net basis, rather than on a gross basis in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 95,
“Statement of Cash Flows”. In addition, we have corrected other immaterial
errors within the Company’s consolidated statements of cash flows. For the year
ended December 31, 2007 these corrections resulted in a decrease in net cash
provided by operating activities of $181,000, an increase in net cash used by
investing activities of $57,000, and an increase in net cash provided by
financing activities of $238,000. For the year ended December 31, 2006 these
corrections resulted in a decrease in net cash provided by operating activities
of $323,000, no change in net cash used by investing activities, and an increase
in net cash provided by financing activities of $323,000.
These
restatements do not affect the Company’s consolidated statements of income
(loss). Accordingly, the Company’s historical net income (loss), earnings (loss)
per share, total assets, and cash and cash equivalents remain unchanged.
Use of
Estimates in the Preparation of Financial Statements.
The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash
and Cash Equivalents.
Cash and cash
equivalents include cash on hand, interest bearing deposits in other banks,
amounts due from banks and federal funds sold. Generally, federal funds are
purchased or sold for one-day periods.
Supplemental Cash Flow Information.
The following table presents supplemental cash flow information for the
years ended December 31, 2008, 2007 and 2006. See Note 2, “Acquisition”, for
additional information on stock issued for acquisition.
|
(Dollars in
thousands)
|
December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in the
year for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
$
|
49,275
|
|
|
$
|
68,330
|
|
|
$
|
49,155
|
|
Income taxes
|
$
|
4,385
|
|
|
$
|
19,131
|
|
|
$
|
14,119
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on
available
|
|
|
|
|
|
|
|
|
|
|
|
for sale securities and derivatives, net of
tax
|
$
|
(1,167
|
)
|
|
$
|
(119
|
)
|
|
$
|
741
|
|
Dividends declared and accrued in other
liabilities
|
$
|
157
|
|
|
$
|
2,110
|
|
|
$
|
1,873
|
|
OREO and premises and equipment
expenditures
|
|
|
|
|
|
|
|
|
|
|
|
accrued in other liabilities
|
$
|
129
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Transfer of loans to OREO
|
$
|
87,881
|
|
|
$
|
3,793
|
|
|
$
|
-
|
|
Stock issued for acquisition
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,472
|
65
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Trading Securities.
Debt and equity
securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities and reported at fair
value, with realized and unrealized gains and losses included in earnings.
Trading securities held at December 31, 2008 and 2007 are related solely to
assets held in a Rabbi Trust for the benefit of the Company’s deferred
compensation plans.
Investment Securities
Available for Sale.
Investment
securities classified as available for sale are not trading securities but may
be sold before maturity in response to changes in the Company’s interest rate
risk profile, funding needs or demand for collateralized deposits by public
entities. Available for sale securities are carried at fair value with
unrealized gains and losses, net of any tax effect, reported within accumulated
other comprehensive income (loss) in stockholders’ equity. For purposes of
computing realized gains and losses, the cost of securities sold is determined
using the specific identification method. The Company analyzes investment
securities for other-than-temporary impairment (“OTTI”) on a quarterly basis.
Declines in fair value which are deemed other-than-temporary, if any, are
reported in noninterest income.
Valuation of Investment Securities Available for Sale.
Investment securities are valued utilizing a number of methods
including quoted prices in active markets, quoted prices for similar assets,
quoted prices for securities in inactive markets and inputs derived principally
from or corroborated by observable market data by correlation or other means. In
addition, certain investment securities are valued based on the Company’s own
assumptions using the best information available using a discounted cash flow
model.
Federal Home Loan Bank Stock.
FHLB
stock is carried at cost which equals its fair value because the shares can only
be redeemed with the FHLB at par. The Bank is required to maintain a minimum
level of investment in FHLB stock based on specific percentages of its
outstanding mortgages and FHLB advances. Stock redemptions are at the discretion
of the FHLB or of the Company, upon five years’ prior notice for FHLB B stock or
six months notice for FHLB A stock to the FHLB.
Loans
Held for Sale.
Loans held for sale include
mortgage loans that are carried at the lower of cost or market value. Market
value generally approximates cost because of the short duration these assets are
held by us. Gains and infrequent losses are recognized in the consolidated
statement of income as the proceeds from sale less the net book value of the
loan including unamortized fees and capitalized direct costs. Servicing rights
are typically not retained. In addition, we originate loans to customers under
Small Business Administration (“SBA”) programs that generally provide for SBA
guarantees of 50% to 85% of each loan. We periodically sell the guaranteed
portion of certain SBA loans to investors and retain the unguaranteed portion
and servicing rights in our loan portfolio. SBA loans are recorded and held
within the loan portfolio until designated to be sold. Gains on these sales are
earned through the sale of the guaranteed portion of the loan for an amount in
excess of the adjusted carrying value of the portion of the loan sold. We
allocate the carrying value of such loans between the portion sold, the portion
retained and a value assigned to the right to service the loan. The difference
between the adjusted carrying value of the portion retained and the face amount
of the portion retained is amortized to interest income over the life of the
related loan using a straight-line method over the anticipated lives of the pool
of SBA loans.
Loans.
Loans are reported at the amount of unpaid
principal net of unearned income and deferred fees and costs. Loan and
commitment fees and certain direct loan origination costs are deferred and
recognized over the life of the loan and/or commitment period as yield
adjustments. Interest income on loans is accrued daily on the unpaid principal
balance outstanding as earned.
Commitments to Extend Credit.
Unfunded
loan commitments are generally related to providing credit facilities to
customers of the bank and are not actively traded financial instruments. These
unfunded commitments are disclosed as commitments to extend credit in Note 23 in
the notes to consolidated financial statements.
66
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Nonaccrual Loans.
Loans (including
impaired loans) are placed on nonaccrual status when the collection of interest
or principal has become 90 days past due or is otherwise considered doubtful.
When a loan is placed on nonaccrual status, the Company stops accruing interest
and unpaid accrued interest is reversed. In addition, the Company stops
amortizing deferred fees and costs. For certain real estate construction loans
accrued unpaid interest as well as qualifying capitalized interest is reversed.
Future interest payments are generally applied against principal. Certain
customers having financial difficulties may have the terms of their loan
agreements modified to require only principal payments and, as such, are
reported as nonaccrual. The Company has a mortgage loan product (“nonstandard
mortgage loan”) that has a more stringent nonaccrual policy. For these loans, if
the collection of principal or interest has become 30 days past due, the loan is
placed on nonaccrual.
Impaired Loans.
A loan is considered to be impaired
when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due (both interest and principal)
according to the contractual terms of the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows discounted at
the loan’s effective interest rate or, as a practical expedient, at the loan’s
observable market price or the fair market value of the collateral less selling
costs if the loan is collateral dependent. The Company revised its loan policy
on accounting for the recognition of impairment on real estate collateral
dependent loans in the first quarter ended March 31, 2008. The Company charges
off the amount of impairment at the time of impairment, rather than placing the
impaired loan amount in a specific reserve. Applying this policy change has
accelerated the timing of charge-offs associated with real estate collateral
dependent impaired loans. In addition, known impairments on non-real estate
secured loans that are impaired are charged off immediately rather than
recording a specific reserve in the allowance for loan losses.
Allowance for Credit Losses.
The
allowance for credit losses is comprised of two components, the allowance for
loan losses and the reserve for unfunded commitments. The allowance for loan
losses is a calculation applied to outstanding loan balances, while the reserve
for unfunded commitments is based upon a calculation applied to that portion of
total loan commitments not yet funded for the period reported.
The
allowance for credit losses is based on management’s estimates. Management
determines the adequacy of the allowance for credit losses based on evaluations
of the loan portfolio, recent loss experience and other factors, including
economic conditions. The Company determines the amount of the allowance for
credit losses required for certain sectors based on relative risk
characteristics of the loan portfolio. Actual losses may vary from current
estimates. These estimates are reviewed periodically and, as adjustments become
necessary, are reported in earnings in the periods in which they become known.
The allowance for credit losses is increased by provisions for credit losses in
earnings. Losses are charged to the allowance while recoveries are credited to
the allowance.
Reserve for Unfunded Commitments.
As a
component of allowance for credit losses, a reserve for unfunded commitments is
maintained at a level that, in the opinion of management, is adequate to absorb
losses associated with the Bank’s commitment to lend funds under existing
agreements such as letters or lines of credit or construction loans. Management
determines the adequacy of the reserve for unfunded commitments based upon
reviews of individual credit facilities, current economic conditions, the risk
characteristics of the various categories of commitments as well as pooled
commitments with similar risk characteristics and other relevant factors. The
reserve is based on estimates, and ultimate losses may vary from the current
estimates. These estimates are evaluated on a regular basis and, as adjustments
become necessary, they are reported in the provision for credit losses in the
income statement in the periods in which they become known.
Other
Real Estate Owned.
OREO is real property of
which the Bank has taken substantial possession or that has been deeded to the
Bank through a deed-in-lieu of foreclosure, non-judicial foreclosure, judicial
foreclosure or similar process in partial or full satisfaction of a loan or
loans. OREO is initially recorded at the lower of the carrying amount of the
loan or fair value of the property less estimated costs to sell. This amount
becomes the property’s new basis. Management considers third party appraisals as
well as independent fair market value assessments from realtors or persons
involved in selling OREO in determining the fair value of particular properties.
Accordingly, the valuation of OREO is subject to significant external and
internal judgment. Management also periodically reviews OREO to determine
whether the property continues to be carried at the lower of its recorded book
value or fair value, net of estimated costs to sell. Any further OREO valuation
adjustments or subsequent gains or losses on the final disposition of OREO are
charged to other real estate owned sales and valuation adjustments. Expenses
from the maintenance and operations of OREO are included in other noninterest
expense in the statements of income (loss).
Premises and Equipment.
Premises and
equipment are stated at cost, less accumulated depreciation and amortization.
Land is carried at cost. Depreciation is computed on the straight-line method
over the estimated useful lives of the related assets. In general, furniture and
equipment is amortized over a useful life of 3 to 10 years, software and
computer related equipment is amortized over 3 to 5 years and buildings are
amortized over periods up to 40 years. Leasehold improvements are amortized over
the life of the related lease, or the life of the related assets, whichever is
shorter. Expenditures for major renovations and betterments of the Company’s
premises and equipment are capitalized. Improvements are capitalized and
depreciated over their estimated useful lives. Minor repairs, maintenance and
improvements are charged to operations as incurred. When property is replaced or
otherwise disposed of, the cost of such assets and the related accumulated
depreciation are removed from their respective accounts. Related gain or loss,
if any, is recorded in current operations.
67
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Goodwill and Intangible Assets.
At
December 31, 2008, Bancorp had $14.1 million in goodwill and core deposit
intangible assets that relate to its acquisition of Mid-Valley Bank. All
goodwill and core deposit intangible assets reside at the Bank operating
segment. Core deposit intangibles are reviewed for impairment at least annually
as of year end. Goodwill is evaluated for impairment on an annual basis at April
30, or when circumstances indicate an impairment may exist. The Company
evaluated its goodwill as of December 31, 2008, due to a decrease in the
Company’s market capitalization, and concluded that there was no impairment. The
Company also evaluated its core deposit intangible at December 31, 2008 and
determined there was no impairment. If impairment were deemed to exist, goodwill
or other intangible assets would be written down to estimated fair value,
resulting in a charge to earnings in the period in which the write down occurs.
The
goodwill impairment analysis requires management to make highly subjective
judgments in determining if an indicator of impairment has occurred. Events and
factors that may significantly affect the analysis include: a significant
decline in our expected future cash flows, a substantial increase in the
discount factor, a sustained, significant decline in our stock price and market
capitalization, a significant adverse change in legal factors or in the business
climate. Other factors might include changing competitive forces, customer
behaviors and attrition, revenue trends, cost structures, along with specific
industry and market conditions. Adverse change in these factors could have a
significant impact on the recoverability of intangible assets and could have a
material impact on our consolidated financial statements.
The goodwill impairment analysis
involves a two-step process. The first step is a comparison of the Bank’s fair
value to its carrying value. We estimate fair value using a combination of the
income approach and market approach with the best information available,
including market information and discounted cash flow analysis. The income
approach uses a reporting unit’s projection of estimated operating results and
cash flows that is discounted using a weighted-average cost of capital that
reflects current market conditions. The market approach estimates the fair value
of a company by examining the price at which similar companies, or shares of
similar companies, are exchanged. Based on management’s goodwill impairment
analysis, it was determined that the Bank’s fair value exceeded its carrying
value and therefore required no impairment under step one of the process.
Further erosion of the Company’s stock price could lead to a future goodwill
impairment write down.
If the
carrying value of the reporting unit was determined to have been higher than its
fair value, there would have been an indication that impairment may have existed
and the second step would have been performed to measure the amount of
impairment loss. The amount of impairment is determined by comparing the implied
fair value of reporting unit goodwill to the carrying value of the goodwill in
the same manner as if the reporting unit was being acquired in a business
combination. Specifically, a company would allocate the fair value to all of the
assets and liabilities of the reporting unit, including any unrecognized
intangible assets, in a hypothetical analysis that would calculate the implied
fair value of goodwill. If the implied fair value of goodwill is less than the
recorded goodwill, the Company would record an impairment charge for the
difference.
Servicing of Financial Assets.
Bancorp
originates loans under SBA loan programs. Bancorp periodically sells such loans,
and retains servicing rights on the loans originated and sold. The fair value of
the servicing rights are determined based upon discounted cash flow analysis and
such servicing rights are being amortized in proportion to, and over the period
of, estimated future net servicing income. The servicing rights are periodically
evaluated for impairment. No impairment was recognized during 2008, 2007, or
2006.
Income
Taxes
. Income taxes are accounted for
using the asset and liability method. Under this method, a deferred tax asset or
liability is determined based on the enacted tax rates that will be in effect
when the differences between the financial statement carrying amounts and tax
basis of existing assets and liabilities are expected to be reported in
Bancorp’s income tax returns. The deferred tax provision for the year is equal
to the net change in the net deferred tax asset from the beginning to the end of
the year, less amounts applicable to the change in value related to investments
available for sale as well as value changes in interest rate swaps accounted for
as hedges. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.
Operating Segments.
SFAS No. 131,
“Disclosure about Segments of an Enterprise and Related Information”, requires
public enterprises to report certain information about their operating segments
in the financial statements. The basis for determining the Company’s operating
segments is the way in which management operates the businesses. Bancorp has
identified two reportable segments, banking and other which include West Coast
Trust. See Note 25, “Segment and related information” of the notes to
consolidated financial statements for more detail.
Trust
Company Assets.
Assets (other than cash
deposits) held by West Coast Trust in fiduciary or agency capacities for its
trust customers are not included in the accompanying consolidated balance
sheets, since such items are not assets of West Coast Trust.
Borrowings
. Federal funds purchased and securities sold under agreements
to repurchase generally mature within one to four days from the transaction
date. Other short-term borrowed funds mature within one year from the
transaction date. Long-term borrowed funds extend beyond one year.
68
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Earnings Per Share Calculation.
Earnings per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the year for
financial statement purposes. Diluted earnings per share is calculated by
adjusting income and outstanding shares, assuming conversion of all potentially
dilutive securities, using the treasury stock method.
Service Charges on Deposit Accounts.
Service charges on deposit accounts primarily represent monthly fees
based on minimum balances or transaction-based fees. These fees are recognized
as earned or as transactions occur and services are provided.
Payment Systems Revenue.
Payment
systems revenue includes interchange income from credit and debit cards, annual
fees, and other transaction and account management fees. Interchange income is a
fee paid by a merchant bank to the card-issuing bank through the interchange
network. Interchange fees are set by the credit card associations and are based
on cardholder purchase volumes. The Company records interchange income as
transactions occur. Transaction and account management fees are recognized as
transactions occur or services are provided, except for annual fees, which are
recognized over the applicable period. Volume-related payments to partners and
credit card associations and expenses for rewards programs are also recorded
within payment systems revenue. Payments to partners and expenses related to
rewards programs are recorded when earned by the partner or customer.
Merchant
processing services revenue consists principally of transaction and account
management fees charged to merchants for the electronic processing of
transactions, net of interchange fees paid to the credit card issuing bank, card
association assessments, and revenue sharing amounts, and are all recognized at
the time the merchant’s transactions are processed or other services are
performed. The Company may enter into revenue sharing agreements with referral
partners or in connection with purchases of merchant contracts from sellers. The
revenue sharing amounts are determined primarily on sales volume processed or
revenue generated for a particular group of merchants. Merchant processing
revenue also includes revenues related to point-of-sale equipment recorded as
sales when the equipment is shipped or as earned for equipment
rentals.
Trust
and Investment Services Revenue.
Trust and
investment management fees are recognized over the period in which services are
performed and are based on a percentage of the fair value of the assets under
management or administration, fixed based on account type, or transaction-based
fees.
New
Accounting Pronouncements.
In September 2006,
the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair
Value Measurements.” This statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. This statement applies under other
accounting pronouncements that require or permit fair value measurements. The
Company adopted SFAS No. 157 on January 1, 2008. The adoption of this standard
did not have a material impact on the Company. See Note 21 “Fair Value
Measurement” of the notes to consolidated financial statements for more detail.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with
an option to report certain financial assets and liabilities at fair value with
changes in fair value reported in earnings. In addition, it requires disclosures
related to an entity’s election to use fair value reporting. It also requires
entities to display the fair value of those assets and liabilities for which the
entity has elected to use fair value on the face of the balance sheet. SFAS No.
159 is effective for the Company beginning January 1, 2008. The Company did not
choose to report additional assets and liabilities at fair value other than
those required to be accounted for at fair value prior to the adoption of SFAS
No. 159. Therefore, the adoption of this standard had no impact on the Company.
In
September 2006, the FASB’s Emerging Issues Task Force (“EITF”) reached a
consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and
Postretirement Benefits Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” (“EITF 06-4”). This addresses endorsement split-dollar life
insurance arrangements that provide a benefit to an employee that extends to
postretirement periods. In an endorsement split-dollar arrangement, the employer
owns and controls the policy, and the employer and an employee split the
insurance policy’s cash surrender value and/or death benefits. The EITF
consensus requires that the deferred compensation or postretirement benefit
aspects of an endorsement-type split-dollar life insurance arrangement be
recognized as a liability by the employer and that the obligation is not
effectively settled by the purchase of a life insurance policy. The liability
for future benefits would be recognized based on the substantive agreement with
the employee, which may be either to provide a future death benefit or to pay
for the future cost of the life insurance. The Company adopted EITF 06-4 on
January 1, 2008. In conjunction with that adoption, the Company recorded a $.4
million, net of deferred taxes, adjustment to retained earnings and a
corresponding liability of $.6 million for future postretirement benefits at
January 1, 2008. In the future the Company will record postretirement benefit
expense in salaries and employee benefits in the income statement with an
increase to liability for postretirement benefits.
69
2.
ACQUISITION
On June
23, 2006, the Company completed a merger transaction in which it acquired
Mid-Valley Bank (“Mid-Valley”), headquartered in Woodburn, Oregon. This
acquisition was consistent with the Company’s strategy of expanding its
operations and market share in Oregon and Washington. Mid-Valley had a similar
focus on community banking, as well as commercial and agricultural lending, as
West Coast Bank. The results of operations of Mid-Valley have been included in
the Company’s consolidated financial statements since the acquisition date.
The aggregate purchase price for the acquisition was $22.0 million which
included cash of $5.0 million, direct merger costs of $.5 million, and
approximately .6 million shares of common stock with an aggregate value of $16.5
million. The aggregate value of the common stock was calculated for this purpose
using a $27.10 per share value based on the average closing price of Bancorp
stock beginning two days prior to the acquisition announcement date of February
1, 2006, and ending two days after the announcement date. In addition, all
outstanding options to purchase Mid-Valley stock were settled for cash payments
totaling $3.6 million, which represented the aggregate difference between the
transaction value of $19.19 per share of outstanding Mid-Valley stock and the
exercise prices of the options.
The transaction was accounted for under the purchase method of
accounting, with Mid-Valley’s assets and liabilities being recorded at their
estimated fair values. Mid-Valley’s allowance for loan losses was recorded at
carrying value and contained no specific reserves. The purchase price in excess
of the net fair value of the assets and liabilities acquired was recorded as
goodwill. The amount of goodwill recorded was $13.1 million. The goodwill will
not be tax deductible for federal income tax purposes because the transaction is
treated as a tax free reorganization. The Company is amortizing the resulting
core deposit intangible of $2.2 million using the sum of the years’ digits
method over seven years.
The following
table summarizes the estimated fair value of assets and liabilities purchased at
the date of acquisition:
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
ASSETS ACQUIRED:
|
|
|
|
|
Cash and cash
equivalents
|
$
|
11,924
|
|
|
Investment securities
|
|
18,152
|
|
|
Loans,
net
|
|
71,950
|
|
|
Premises and equipment, net
|
|
953
|
|
|
Core deposit
intangible assets
|
|
2,228
|
|
|
Goodwill
|
|
13,059
|
|
|
Other assets,
net
|
|
3,499
|
|
|
Total assets
acquired
|
$
|
121,765
|
|
|
LIABILITIES
ASSUMED:
|
|
|
|
|
Deposits
|
$
|
85,547
|
|
|
Borrowings
|
|
9,604
|
|
|
Other liabilities
|
|
5,134
|
|
|
Total liabilities assumed
|
$
|
100,285
|
|
|
Net assets purchased
|
$
|
21,480
|
The
following unaudited adjusted pro forma financial information for the year ended
December 31, 2006 assumes that the Mid-Valley acquisition occurred as of January
1, 2006. The pro forma results have been prepared for comparative purposes only
and are not necessarily indicative of the results of operations which may occur
in the future or that would have occurred had the Mid-Valley acquisition been
consummated on the date indicated.
|
|
(In thousands,
except per share amounts)
|
December 31,
|
|
|
|
2006
|
|
|
Net interest income
|
$
|
103,166
|
|
|
Provision for
loan loss
|
|
2,733
|
|
|
Noninterest income
|
|
28,217
|
|
|
Noninterest
expense
|
|
84,534
|
|
|
Income before income taxes
|
|
44,116
|
|
|
Provision for
income taxes
|
|
15,213
|
|
|
Net income
|
$
|
28,903
|
|
|
|
|
|
Basic earnings per share
|
$
|
1.89
|
|
|
Diluted earnings
per share
|
$
|
1.80
|
|
|
|
|
|
Weighted average common shares
|
|
15,322
|
|
|
Weighted average
dilutive shares
|
|
16,015
|
70
3. INVESTMENT SECURITIES
The following
table presents the available for sale investment portfolio as of December 31,
2008 and 2007:
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
|
|
Cost
|
|
Gross Gains
|
|
Gross Losses
|
|
Fair Value
|
|
|
U.S. Treasury securities
|
|
$
|
200
|
|
$
|
23
|
|
$
|
-
|
|
|
$
|
223
|
|
|
U.S. Government
agency securities
|
|
|
7,310
|
|
|
77
|
|
|
-
|
|
|
|
7,387
|
|
|
Corporate securities
|
|
|
12,608
|
|
|
937
|
|
|
(2,668
|
)
|
|
|
10,877
|
|
|
Mortgage-backed
securities
|
|
|
94,846
|
|
|
602
|
|
|
(2,882
|
)
|
|
|
92,566
|
|
|
Obligations of state and political subdivisions
|
|
|
81,025
|
|
|
1,805
|
|
|
(432
|
)
|
|
|
82,398
|
|
|
Equity
investments and other securities
|
|
|
5,161
|
|
|
120
|
|
|
(217
|
)
|
|
|
5,064
|
|
|
Total
|
|
$
|
201,150
|
|
$
|
3,564
|
|
$
|
(6,199
|
)
|
|
$
|
198,515
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
|
|
Cost
|
|
Gross Gains
|
|
Gross Losses
|
|
Fair Value
|
|
|
U.S. Treasury securities
|
|
$
|
200
|
|
$
|
7
|
|
$
|
-
|
|
|
$
|
207
|
|
|
U.S. Government
agency securities
|
|
|
60,554
|
|
|
1,009
|
|
|
(6
|
)
|
|
|
61,557
|
|
|
Corporate securities
|
|
|
20,201
|
|
|
14
|
|
|
(647
|
)
|
|
|
19,568
|
|
|
Mortgage-backed
securities
|
|
|
85,050
|
|
|
135
|
|
|
(988
|
)
|
|
|
84,197
|
|
|
Obligations of state and political subdivisions
|
|
|
85,876
|
|
|
577
|
|
|
(347
|
)
|
|
|
86,106
|
|
|
Equity
investments and other securities
|
|
|
7,963
|
|
|
7
|
|
|
(475
|
)
|
|
|
7,495
|
|
|
Total
|
|
$
|
259,844
|
|
$
|
1,749
|
|
$
|
(2,463
|
)
|
|
$
|
259,130
|
Gross
realized gains on the sale of securities included in earnings in 2008, 2007, and
2006 were $814,000, $96,000, and $43,000, respectively. Gross realized losses in
2008, 2007, and 2006 were $34,000, $163,000, and $729,000, respectively.
In 2008,
the Company recorded OTTI charges totaling $6.3 million pretax, $.4 million
relating to an investment in a Lehman Brothers bond, $3.1 million related to two
pooled trust preferred investments in our corporate securities portfolio, and
$2.8 million for an investment in Freddie Mac preferred stock held in our equity
and other securities portfolio. In reaching the determination to record these
impairments management reviewed the facts and circumstances available
surrounding the securities, including the duration and amount of the unrealized
loss, the financial condition of the issuer and the prospects for a change in
market value within a reasonable period of time. In addition, with respect to
the pooled trust preferred securities, it was determined that the credit and
liquidity spreads had increased significantly. Based on its assessment,
management determined that there was an OTTI in each case and that a charge was
appropriate for these securities.
Dividends
on investment securities for the years 2008, 2007, and 2006 were $294,000,
$302,000, and $280,000, respectively. Securities with a fair value of
approximately $28.3 million and $89.1 million were pledged to secure public
deposits at December 31, 2008 and 2007, respectively. At December 31, 2008 and
December 31, 2007, Bancorp had no reverse repurchase agreements. No outstanding
mortgage-backed securities were classified as high risk at December 31, 2008 or
2007, under applicable regulatory guidelines.
Our U.S.
Government agency securities decreased by $54.2 million from December 31, 2007,
to December 31, 2008, as we used maturing investments and sales to pay down
borrowings.
Our
corporate security portfolio had a $2.7 million net unrealized loss at December
31, 2008. The majority of this loss was associated with the decline in market
value of our $10.8 million in investments in pooled trust preferred securities
issued primarily by banks and insurance companies. These securities are rated A-
or better and have several features that reduce credit risk, including seniority
over certain traunches in the same pool and the benefit of certain collateral
coverage tests. An increase in credit and liquidity spreads contributed to the
unrealized loss associated with these securities. The fair value of these
securities fluctuates as spreads and market interest rates change. These
securities had a $10.8 million carrying value with a $9.0 million fair value at
December 31, 2008.
71
3. INVESTMENT SECURITIES (continued)
Our
mortgage-backed securities portfolio consisted of $55.4 million of U.S. agency
backed mortgages and $37.2 million of non-agency mortgages. The majority of our
non-agency mortgage-backed securities portfolio is comprised of securities
secured by 15 year fully amortizing jumbo loans. All of our non-agency
mortgage-backed securities are rated AAA or Aaa. The unrealized loss in our
mortgage-backed securities portfolio is substantially due to an increase in
interest rates and subsequent increase in credit spreads.
Our
portfolio of securities representing obligations of state and political
subdivisions had an estimated fair value of $82.4 million, while the amortized
cost was $81.0 million, reflecting an unrealized gain of $1.4 million.
Consistent with the industry, the Company has experienced an adverse change in
the credit ratings of the securities in this segment of our portfolio, which is
comprised solely of municipal bonds. At December 31, 2008, the ratings
associated with the securities in this segment were: 10% AAA, 52% AA, 21% A, 14%
BBB and 3% non-rated. At December 31, 2007 the ratings were: 91% AAA, 6% AA, 2%
A and 1% BBB.
The
following table provides information on investment securities with 12 month or
greater continuous unrealized losses as of December 31, 2008:
|
|
(Dollars in
thousands)
|
|
Amortized
cost of
|
|
Fair
value of
|
|
|
|
|
|
|
December 31,
2008
|
|
securities
with an
|
|
securities with an
|
|
|
|
|
|
|
|
|
unrealized loss more than
|
|
unrealized loss more than
|
|
Unrealized
|
|
|
|
|
12 continuous months
|
|
12 continuous months
|
|
Gross Losses
|
|
|
Mortgage-backed securities
|
|
$
|
10,169
|
|
$
|
9,192
|
|
$
|
(977
|
)
|
|
|
Obligations of
state and political subdivisions
|
|
|
1,209
|
|
|
1,169
|
|
|
(40
|
)
|
|
|
Equity investments and other securities
|
|
|
1,800
|
|
|
1,722
|
|
|
(78
|
)
|
|
|
Total
|
|
$
|
13,178
|
|
$
|
12,083
|
|
$
|
(1,095
|
)
|
There
were 9 investment securities with a 12 month or greater continuous unrealized
loss in the investment portfolio at December 31, 2008, with a total unrealized
loss of $1.1 million. At December 31, 2007, there were 45 investment securities
with a 12 month or greater, continuous unrealized loss in the investment
portfolio, with a total unrealized loss of $1.1 million. The unrealized loss on
these investment securities was due to increases in credit and liquidity spreads
causing a decline in their fair market value subsequent to their purchase. The
value of most of our securities fluctuates as market interest rates change.
Based on management’s evaluation and intent, none of the unrealized losses
summarized in this table are considered OTTI. The Company has the ability and
intent to hold securities with unrealized losses until their values recover.
The
following table provides information on investment securities which have an
unrealized loss and have been in an unrealized loss position for less than 12
months as of December 31, 2008:
|
|
(Dollars in
thousands)
|
|
Amortized
cost of
|
|
Fair
value of
|
|
|
|
|
|
|
December 31,
2008
|
|
securities
with an
|
|
securities with an
|
|
|
|
|
|
|
|
|
unrealized loss less than
|
|
unrealized loss less than
|
|
Unrealized
|
|
|
|
|
12 continuous months
|
|
12 continuous months
|
|
Gross Losses
|
|
|
Corporate securities
|
|
$
|
10,150
|
|
$
|
7,482
|
|
$
|
(2,668
|
)
|
|
|
Mortgage-backed
securities
|
|
|
46,305
|
|
|
44,401
|
|
|
(1,904
|
)
|
|
|
Obligations of state and political subdivisions
|
|
|
10,748
|
|
|
10,356
|
|
|
(392
|
)
|
|
|
Equity
investments and other securities
|
|
|
361
|
|
|
221
|
|
|
(140
|
)
|
|
|
Total
|
|
$
|
67,564
|
|
$
|
62,460
|
|
$
|
(5,104
|
)
|
There
were a total of 45 securities in Bancorp’s investment portfolio at December 31,
2008, that have been in a continuous unrealized loss position for less than 12
months, with a book value of $67.6 million and a total unrealized loss of $5.1
million. At December 31, 2007, there were a total of 47 securities in Bancorp’s
investment portfolio that have been in a continuous unrealized loss position for
less than 12 months, with an amortized cost of $62.1 million and a total
unrealized loss of $1.4 million. The unrealized loss on these investment
securities was predominantly caused by increases in credit and liquidity
spreads. The fair value of these securities fluctuates as market interest rates
change. Based on management’s evaluation and intent, none of the unrealized
losses summarized in this table were considered OTTI. The Company has the
ability and intent to hold securities with a stated maturity until the value
recovers.
At
December 31, 2008 and 2007, the Company had $97.9 and $116.3 million,
respectively, in investments securities pledged as collateral for borrowings and
public funds.
72
4. MATURITIES OF INVESTMENT
SECURITIES
The following
table presents the maturities of the investment portfolio at December 31, 2008:
|
|
(Dollars in
thousands)
|
|
Available for sale
|
|
|
December 31,
2008
|
|
Amortized cost
|
|
Fair value
|
|
|
U.S. Treasury securities
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
-
|
|
$
|
-
|
|
|
After one year through
five years
|
|
|
200
|
|
|
223
|
|
|
After five through ten years
|
|
|
-
|
|
|
-
|
|
|
Due after ten
years
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
|
200
|
|
|
223
|
|
|
|
|
|
U.S. Government agency securities:
|
|
|
|
|
|
|
|
|
One year or less
|
|
|
6,151
|
|
|
6,191
|
|
|
After one year through
five years
|
|
|
1,159
|
|
|
1,196
|
|
|
After five through ten years
|
|
|
-
|
|
|
-
|
|
|
Due after ten
years
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
|
7,310
|
|
|
7,387
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
One year or less
|
|
|
-
|
|
|
-
|
|
|
After one year through
five years
|
|
|
509
|
|
|
484
|
|
|
After five through ten years
|
|
|
1,320
|
|
|
1,373
|
|
|
Due after ten
years
|
|
|
10,779
|
|
|
9,020
|
|
|
Total
|
|
|
12,608
|
|
|
10,877
|
|
|
|
|
|
Obligations of state and political subdivisions:
|
|
|
|
|
|
|
|
|
One year or less
|
|
|
2,626
|
|
|
2,649
|
|
|
After one year through
five years
|
|
|
24,766
|
|
|
25,411
|
|
|
After five through ten years
|
|
|
36,562
|
|
|
37,506
|
|
|
Due after ten
years
|
|
|
17,071
|
|
|
16,832
|
|
|
Total
|
|
|
81,025
|
|
|
82,398
|
|
|
|
|
|
Sub-total
|
|
|
101,143
|
|
|
100,885
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
94,846
|
|
|
92,566
|
|
|
Equity
investments and other securities
|
|
|
5,161
|
|
|
5,064
|
|
|
Total securities
|
|
$
|
201,150
|
|
$
|
198,515
|
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.
73
5. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
The following table presents the
loan portfolio as of December 31, 2008 and 2007:
|
|
(Dollars in
thousands)
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
Commercial loans
|
|
$
|
482,405
|
|
|
$
|
504,101
|
|
|
|
Real estate
construction
|
|
|
285,149
|
|
|
|
517,988
|
|
|
|
Real estate mortgage
|
|
|
393,208
|
|
|
|
330,803
|
|
|
|
Commercial real
estate
|
|
|
882,092
|
|
|
|
796,622
|
|
|
|
Installment and other consumer
|
|
|
21,942
|
|
|
|
23,155
|
|
|
|
Total loans
|
|
|
2,064,796
|
|
|
|
2,172,669
|
|
|
|
Allowance for loan losses
|
|
|
(28,920
|
)
|
|
|
(46,917
|
)
|
|
|
Total loans, net
|
|
$
|
2,035,876
|
|
|
$
|
2,125,752
|
|
The Bank
makes commercial, residential and consumer loans to customers primarily
throughout Oregon and Washington. The Bank’s strategy for credit risk management
includes well defined credit policies, specific underwriting criteria, and
ongoing risk monitoring and review processes for all credit exposures. The
Bank’s exposure to credit risk associated with its lending activities is
measured on groups of loans with similar characteristics or on individual loans.
Although the Bank has a diversified loan portfolio, a substantial portion of the
loans in the portfolio were made to borrowers whose ability to honor their loan
contracts is dependent upon the economies of Oregon and/or Washington. In
addition, we have identified the Bank’s two-step residential construction loan
(“two-step loan”) portfolio, which is a portion of our real estate construction
loan portfolio, as having a concentration of credit risk. The two-step loan
portfolio has decreased substantially due to charge-offs and foreclosures and a
subsequent shift into OREO.
The following table presents the
real estate construction loans by category for the dates shown:
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
(Dollars in
thousands)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
Commercial construction
|
|
$
|
92,615
|
|
|
32
|
%
|
|
$
|
90,670
|
|
|
17
|
%
|
|
|
Two-step
residential construction loans
|
|
|
53,084
|
|
|
19
|
%
|
|
|
262,952
|
|
|
51
|
%
|
|
|
Residential construction to builder
|
|
|
71,296
|
|
|
25
|
%
|
|
|
80,737
|
|
|
16
|
%
|
|
|
Residential
subdivision or site development
|
|
|
68,485
|
|
|
24
|
%
|
|
|
84,620
|
|
|
16
|
%
|
|
|
Net deferred fees
|
|
|
(331
|
)
|
|
0
|
%
|
|
|
(991
|
)
|
|
0
|
%
|
|
|
Total real estate construction
loans
|
|
$
|
285,149
|
|
|
100
|
%
|
|
$
|
517,988
|
|
|
100
|
%
|
At December 31, 2008 and 2007, the
reserve for unfunded commitments was $1.0 million and $8.0 million,
respectively.
The following is an analysis of the
changes in the allowance for credit losses:
|
|
(Dollars in
thousands)
|
|
Year Ending December 31,
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
Balance, beginning of period
|
|
$
|
54,903
|
|
|
$
|
23,017
|
|
|
$
|
20,469
|
|
|
|
Provision for
credit losses
|
|
|
40,367
|
|
|
|
38,956
|
|
|
|
2,733
|
|
|
|
Losses charged to the allowance
|
|
|
(68,255
|
)
|
|
|
(7,713
|
)
|
|
|
(1,921
|
)
|
|
|
Recoveries
credited to the allowance
|
|
|
2,919
|
|
|
|
643
|
|
|
|
849
|
|
|
|
Allowance for loan losses, from acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
887
|
|
|
|
Balance, end of
period
|
|
$
|
29,934
|
|
|
$
|
54,903
|
|
|
$
|
23,017
|
|
|
|
|
|
|
Components of allowance for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
28,920
|
|
|
$
|
46,917
|
|
|
|
|
|
|
|
Reserve for unfunded commitments
|
|
|
1,014
|
|
|
|
7,986
|
|
|
|
|
|
|
|
Total allowance
for credit losses
|
|
$
|
29,934
|
|
|
$
|
54,903
|
|
|
|
|
|
74
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The
process for determining the adequacy of the allowance for credit losses is
critical to our financial results. The allowance for credit losses is
management’s best estimate of losses inherent in the loan portfolio. It requires
difficult, subjective and complex judgments, as a result of the need to make
estimates about the effect of matters that are uncertain. Therefore, we cannot
provide assurance that, in any particular period, we will not have sizeable
credit losses in relation to the amount reserved. We may need to significantly
adjust the allowance for credit losses, considering current factors at the time,
including economic or market condition and ongoing internal and external
examination processes. Management believes the balance of the allowance for
credit losses is adequate to absorb losses on all loans and loan commitments in
the portfolio.
The
provision for credit losses of $40.4 million for 2008 was primarily caused by
negative risk rating changes and higher net charge-offs related to our loan
portfolio outside the two-step program. The provision for credit losses of $38.9
million for 2007 increased $36.2 million as compared to 2006, largely due to the
significant fourth quarter provision for credit losses of $27.8 million
associated with our two-step loan portfolio as well as higher net loan
charge-offs in the commercial and residential construction loan portfolios.
Loans on
which the accrual of interest has been discontinued were approximately $127.6
million, $26.4 million and $1.5 million at December 31, 2008, 2007, and 2006,
respectively. Interest income foregone on nonaccrual loans was approximately
$13.6 million, $1.4 million and $.1 million in 2008, 2007, and 2006,
respectively.
At December 31, 2008 and 2007,
Bancorp’s recorded investment in certain loans that were considered to be
impaired was $161.9 million and $33.2 million, respectively. At December 31,
2008, there were no specific valuation allowances for impaired loans due to the
Company’s revised loan policy on accounting for the recognition of impairment on
real estate collateral dependent loans in the first quarter ended March 31,
2008. At December 31, 2007, $21.7 million of these impaired loans had a specific
related valuation allowance of $3.6 million while $11.5 million did not require
a specific valuation allowance.
The
average recorded investment in impaired loans for the years ended December 31,
2008, 2007 and 2006 was approximately, $128.6 million, $15.5 million and $3.8
million, respectively. For the years ended December 31, 2008, 2007 and 2006,
interest income recognized on impaired loans totaled $1,195,000, $23,000, and
$220,000, respectively, all of which was recognized on a cash basis.
At
December 31, 2008 and 2007, Bancorp had $1.2 million and $1.4 million,
respectively, of overdrafts classified as loans in the installment and other
consumer loan category.
6. PREMISES AND EQUIPMENT
Premises and equipment consists of
the following:
|
|
(Dollars in
thousands)
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
Land
|
$
|
4,439
|
|
|
$
|
4,439
|
|
|
|
Buildings and
improvements
|
|
30,306
|
|
|
|
28,809
|
|
|
|
Furniture and equipment
|
|
28,815
|
|
|
|
28,695
|
|
|
|
Construction in
progress
|
|
2,294
|
|
|
|
3,339
|
|
|
|
|
|
65,854
|
|
|
|
65,282
|
|
|
|
Accumulated
depreciation
|
|
(32,727
|
)
|
|
|
(30,549
|
)
|
|
|
Total
|
$
|
33,127
|
|
|
$
|
34,733
|
|
Depreciation included in occupancy and equipment expense amounted to $4.7
million, $4.6 million, and $3.6 million for the years ended December 31, 2008,
2007 and 2006, respectively. The Company periodically reviews the recorded value
of its long-lived assets, specifically premises and equipment, to determine
whether impairment exists. No impairments were recorded during 2008, 2007, or
2006.
75
7. GOODWILL AND INTANGIBLE ASSETS
The following
table summarizes the changes in Bancorp’s goodwill and core deposit intangible
asset for the periods shown:
|
|
(Dollars in
thousands)
|
|
|
|
Core
deposit
|
|
|
|
Goodwill
|
|
intangible
|
|
|
Balance, January 1, 2007
|
$
|
13,059
|
|
$
|
1,973
|
|
|
|
Amortization
|
|
-
|
|
|
(541
|
)
|
|
|
Balance, December 31, 2007
|
$
|
13,059
|
|
$
|
1,432
|
|
|
|
Amortization
|
|
-
|
|
|
(437
|
)
|
|
|
Balance, December 31, 2008
|
$
|
13,059
|
|
$
|
995
|
|
Acquired
goodwill and core deposit intangible are related to the acquisition of
Mid-Valley Bank. All acquired goodwill resides in the Bank operating segment.
The Company evaluated its goodwill as of December 31, 2008, due to a decrease in
the Company’s market capitalization, and concluded that there was no
impairment.
The following table presents the forecasted core deposit intangible asset
amortization expense for 2009 through 2013:
|
|
(Dollars in
thousands)
|
Full
year
|
|
|
|
expected
|
|
|
Year
|
amortization
|
|
|
2009
|
$
|
358
|
|
|
2010
|
|
279
|
|
|
2011
|
|
199
|
|
|
2012
|
|
119
|
|
|
2013
|
|
40
|
8. OTHER ASSETS
The following table summarizes Bancorp’s other assets for the years ended
December 31, 2008 and 2007:
|
|
(Dollars in
thousands)
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
Deferred tax assets, net
|
$
|
15,258
|
|
$
|
18,314
|
|
|
Accrued interest
receivable
|
|
11,006
|
|
|
16,540
|
|
|
Investment in affordable housing tax credits
|
|
5,912
|
|
|
6,889
|
|
|
Income taxes
receivable
|
|
16,579
|
|
|
-
|
|
|
Other
|
|
12,151
|
|
|
16,032
|
|
|
Total other
assets
|
$
|
60,906
|
|
$
|
57,775
|
Bancorp
has invested in two limited partnerships that operate qualified affordable
housing properties. Tax credits and tax deductions from operating losses are
passed through the partnerships to Bancorp. The Company accounts for these
investments using the equity method.
76
9. OTHER REAL ESTATE OWNED, NET
The following
table summarizes Bancorp’s OREO for the years ended December 31, 2008 and 2007:
|
|
(Dollars in
thousands)
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
Balance, beginning period
|
$
|
3,255
|
|
|
$
|
-
|
|
|
|
Additions to
OREO
|
|
89,128
|
|
|
|
3,786
|
|
|
|
Disposition of OREO
|
|
(17,488
|
)
|
|
|
(531
|
)
|
|
|
Valuation
adjustments in the period
|
|
(4,785
|
)
|
|
|
-
|
|
|
|
Total OREO
|
$
|
70,110
|
|
|
$
|
3,255
|
|
The following table summarizes Bancorp’s OREO valuation allowance for the
years ended December 31, 2008 and 2007:
|
|
(Dollars in
thousands)
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
Balance, beginning period
|
$
|
175
|
|
|
$
|
175
|
|
|
Additions to the
valuation allowance
|
|
4,785
|
|
|
|
-
|
|
|
Deductions from the valuation allowance
|
|
(1,040
|
)
|
|
|
-
|
|
|
Total OREO
valuation allowance
|
$
|
3,920
|
|
|
$
|
175
|
10. BORROWINGS
The following table summarizes Bancorp’s borrowings for the years ended
December 31, 2008 and 2007:
|
|
(Dollars in
thousands)
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
FHLB advances
|
$
|
132,000
|
|
$
|
167,000
|
|
|
Long-term borrowings:
|
|
|
|
|
|
|
|
FHLB non-putable advances
|
|
61,059
|
|
|
68,100
|
|
|
FHLB putable
advances
|
|
30,000
|
|
|
15,000
|
|
|
Total long-term borrowings
|
|
91,059
|
|
|
83,100
|
|
|
Total borrowings
|
$
|
223,059
|
|
$
|
250,100
|
FHLB
advances are collateralized, as provided for in an advance, pledge and security
agreement with the FHLB, by certain investment securities and mortgage-backed
securities, stock owned by Bancorp including deposits at the FHLB and certain
qualifying loans. This advance agreement requires FHLB prior consent to utilize
available credit. At December 31, 2008, the Company had additional borrowing
capacity available at the FHLB of $279.4 million based on pledged
collateral.
Long-term
borrowings at December 31, 2008, consist of notes with fixed maturities and
structured advances with the FHLB totaling $91.1 million. Total long-term
borrowings with fixed maturities were $61.1 million, with rates ranging from
3.24% to 5.42%. Bancorp had three structured advances totaling $30.0 million,
with original terms of three and five years at a rate of 2.50 % to 4.46%. The
scheduled maturities on these structured advances occur in September 2010,
February 2013 and August 2013, although the FHLB may under certain circumstances
require repayment of these structured advances prior to maturity. Principal
payments due at scheduled maturity of Bancorp’s long-term borrowings at December
31, 2008, are $32.6 million in 2010, $16.5 million in 2011, $20.1 million in
2012, and $21.9 million in 2013.
Long-term
borrowings at December 31, 2007 consist of notes with fixed maturities and
structured advances with the FHLB totaling $83.1 million. Total long-term
borrowings with fixed maturities were $68.1 million. Bancorp had two structured
advances totaling $15.0 million with original terms of three and five years, and
final maturities in June 2009 and September 2010. The FHLB may under certain
circumstances require repayment of these advances prior to their scheduled
maturities.
Bancorp
had no outstanding Federal Funds purchased from correspondent banks, borrowings
from the discount window, or reverse repurchase agreements at December 31, 2008
and 2007.
77
11. JUNIOR SUBORDINATED DEBENTURES
At
December 31, 2008, six wholly-owned subsidiary grantor trusts established by
Bancorp had issued and sold $51 million of pooled trust preferred securities
(“trust preferred securities”). Trust preferred securities accrue and pay
distributions periodically at specified annual rates as provided in each
indenture. The trusts used all of the net proceeds from each sale of trust
preferred securities to purchase a like amount of junior subordinated debentures
(the “Debentures”) of the Company. The Debentures are the sole assets of the
trusts. The Company’s obligations under the Debentures and related documents,
taken together, constitute a full and unconditional guarantee by the Company of
the obligations of the trusts. The trust preferred securities are mandatorily
redeemable upon the maturity of the Debentures and may be subject to earlier
redemption by the Company as provided in the indentures. The Company has the
right to redeem the Debentures in whole (but not in part) on or after specific
dates, at a redemption price specified in the indentures plus any accrued but
unpaid interest to the redemption date.
The following table is a summary of
outstanding trust preferred securities at December 31, 2008:
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred security
|
|
|
|
|
|
Rate
at
|
|
|
|
Next
possible
|
|
|
Issuance Trust
|
|
Issuance date
|
|
amount
|
|
Rate type
(1)
|
|
Initial rate
|
|
12/31/08
|
|
Maturity date
|
|
redemption date
|
|
|
West Coast Statutory Trust III
|
|
September 2003
|
|
$
|
7,500
|
|
Variable
|
|
6.75%
|
|
4.82
|
%
|
|
September 2033
|
|
September 2013
|
|
|
West Coast
Statutory Trust IV
|
|
March
2004
|
|
$
|
6,000
|
|
Fixed
|
|
5.88%
|
|
5.88
|
%
|
|
March
2034
|
|
March
2009
|
|
|
West Coast Statutory Trust V
|
|
April 2006
|
|
$
|
15,000
|
|
Variable
|
|
6.79%
|
|
3.43
|
%
|
|
June 2036
|
|
June 2011
|
|
|
West Coast
Statutory Trust VI
|
|
December
2006
|
|
$
|
5,000
|
|
Variable
|
|
7.04%
|
|
3.68
|
%
|
|
December
2036
|
|
December
2011
|
|
|
West Coast Statutory Trust VII
|
|
March 2007
|
|
$
|
12,500
|
|
Variable
|
|
6.90%
|
|
3.55
|
%
|
|
March 2037
|
|
March 2012
|
|
|
West Coast
Statutory Trust VIII
|
|
June
2007
|
|
$
|
5,000
|
|
Variable
|
|
6.74%
|
|
3.38
|
%
|
|
June
2037
|
|
June
2012
|
|
|
|
|
Total
|
|
$
|
51,000
|
|
|
|
Weighted rate
|
|
3.97
|
%
|
|
|
|
|
|
(1)
|
|
The variable rate preferred securities reprice
quarterly.
|
The
interest rates on the trust preferred securities issued in September 2003, April
2006, December 2006, March 2007, and June 2007 reset quarterly and are tied to
the London Interbank Offered Rate (“LIBOR”) rate.
The
junior subordinated debentures issued by Bancorp to the grantor trust are
reflected in our consolidated balance sheet in the liabilities section at
December 31, 2008 and 2007, under the caption “junior subordinated debentures.”
Bancorp records interest expense on the corresponding junior subordinated
debentures in the consolidated statements of income. The common capital
securities issued by the trusts are recorded within other assets in the
consolidated balance sheets, and totaled $1.6 million at December 31, 2008 and
2007.
78
12. COMMITMENTS AND CONTINGENT
LIABILITIES
The
Company leases land and office space under 52 leases, of which 49 are long-term
operating leases that expire between 2009 and 2023. At the end of most of the
respective lease terms, Bancorp has the option to renew the leases at fair
market value. At December 31, 2008, minimum future lease payments under these
leases and other operating leases were:
|
|
(Dollars in
thousands)
|
|
Minimum Future
|
|
|
Year
|
|
Lease Payments
|
|
|
2009
|
|
$
|
3,802
|
|
|
2010
|
|
|
3,504
|
|
|
2011
|
|
|
3,271
|
|
|
2012
|
|
|
3,148
|
|
|
2013
|
|
|
3,013
|
|
|
Thereafter
|
|
|
10,256
|
|
|
Total
|
|
$
|
26,994
|
Rental
expense for all operating leases was $4.1 million, $3.7 million, and $3.0
million for the years ended December 31, 2008, 2007, and 2006, respectively.
Bancorp
is periodically party to litigation arising in the ordinary course of business.
Based on information currently known to management, although there are
uncertainties inherent in litigation, we do not believe there is any legal
action to which Bancorp or any of its subsidiaries is a party that, individually
or in the aggregate, will have a materially adverse effect on Bancorp’s
financial condition and results of operations, cash flows, or liquidity.
13. INCOME TAXES
The provision (benefit) for income
taxes for the last three years consisted of the following:
|
|
(Dollars in
thousands)
|
Year ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(9,717
|
)
|
|
$
|
17,401
|
|
|
$
|
13,009
|
|
|
State
|
|
(1,692
|
)
|
|
|
2,599
|
|
|
|
1,874
|
|
|
|
|
(11,409
|
)
|
|
|
20,000
|
|
|
|
14,883
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
3,302
|
|
|
|
(11,143
|
)
|
|
|
369
|
|
|
State
|
|
509
|
|
|
|
(1,736
|
)
|
|
|
58
|
|
|
|
|
3,811
|
|
|
|
(12,879
|
)
|
|
|
427
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
(6,415
|
)
|
|
|
6,258
|
|
|
|
13,378
|
|
|
State
|
|
(1,183
|
)
|
|
|
863
|
|
|
|
1,932
|
|
|
Total
|
$
|
(7,598
|
)
|
|
$
|
7,121
|
|
|
$
|
15,310
|
79
13. INCOME TAXES (continued)
Net
deferred taxes are included in other assets on the Company’s balance sheet. The
tax effect of temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities as of December 31, 2008 and
2007 are presented below:
|
|
(Dollars in
thousands)
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Allowance for
loan losses
|
$
|
11,114
|
|
$
|
18,030
|
|
|
Reserve for unfunded commitments
|
|
390
|
|
|
3,069
|
|
|
Net unrealized
loss on investments
|
|
|
|
|
|
|
|
available for sale
|
|
1,035
|
|
|
280
|
|
|
Deferred employee benefits
|
|
1,356
|
|
|
1,092
|
|
|
Loss on
impairment of securities
|
|
2,840
|
|
|
405
|
|
|
Stock option and restricted stock
|
|
796
|
|
|
488
|
|
|
Valuation
allowance on OREO
|
|
1,506
|
|
|
67
|
|
|
Capitalized OREO expenses
|
|
629
|
|
|
-
|
|
|
Other
|
|
1,173
|
|
|
948
|
|
|
Total deferred tax
assets
|
|
20,839
|
|
|
24,379
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
1,033
|
|
|
1,134
|
|
|
Loan origination costs
|
|
2,108
|
|
|
2,365
|
|
|
Federal Home
Loan Bank stock dividends
|
|
1,893
|
|
|
1,826
|
|
|
Intangible assets
|
|
310
|
|
|
458
|
|
|
Other
|
|
237
|
|
|
282
|
|
|
Total deferred tax
liabilities
|
|
5,581
|
|
|
6,065
|
|
|
Net deferred tax assets
|
$
|
15,258
|
|
$
|
18,314
|
Based on
historical performance, the Company believes it is more likely than not that the
net deferred tax assets at December 31, 2008 and 2007 will be used to reduce
future taxable income and therefore no valuation allowance associated with
deferred tax assets has been established at December 31, 2008 and 2007.
The effective tax rate varies from
the federal income tax statutory rate. The reasons for the variance are as
follows:
|
|
(Dollars in
thousands)
|
Year ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
Expected federal income tax provision
(benefit)
(1)
|
$
|
(4,730
|
)
|
|
$
|
8,387
|
|
|
$
|
15,599
|
|
|
|
State income
tax, net of federal income tax effect
|
|
(769
|
)
|
|
|
561
|
|
|
|
1,256
|
|
|
|
Interest on obligations of state and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exempt from federal
tax
|
|
(1,302
|
)
|
|
|
(1,247
|
)
|
|
|
(1,068
|
)
|
|
|
Investment tax
credits
|
|
(880
|
)
|
|
|
(598
|
)
|
|
|
(521
|
)
|
|
|
Bank owned life insurance
|
|
(309
|
)
|
|
|
(303
|
)
|
|
|
(286
|
)
|
|
|
Stock
options
|
|
177
|
|
|
|
149
|
|
|
|
186
|
|
|
|
Other, net
|
|
215
|
|
|
|
172
|
|
|
|
144
|
|
|
|
Total
|
$
|
(7,598
|
)
|
|
$
|
7,121
|
|
|
$
|
15,310
|
|
|
(1)
|
|
Federal income tax provision applied at 34% in 2008 and
35% in all other periods.
|
Bancorp
is subject to U.S. federal income tax and income tax of the State of Oregon. The
years 2005 through 2007 remain open to examination for federal income taxes, and
years 2004 through 2007 remain open for State examination. As of December 31,
2008 and 2007, Bancorp had no unrecognized tax benefits or uncertain tax
positions. In addition, Bancorp had no accrued interest or penalties as of
January 1, 2008 or December 31, 2008. It is Bancorp’s policy to record interest
and penalties as a component of income tax expense.
80
14. STOCKHOLDERS’ EQUITY AND REGULATORY
REQUIREMENTS
Authorized capital of Bancorp includes 10,000,000 shares of Preferred
Stock no par value, none of which were issued at December 31, 2008, or 2007.
In July
2000, Bancorp announced a stock repurchase program that was expanded in
September 2000, June 2001, September 2002, April 2004, and by 1.0 million shares
in September 2007. Under this plan, the Company can purchase up to 4.88 million
shares of the Company’s common stock. The Company does not intend to repurchase
shares in 2009. Total shares available for repurchase under this plan are
1,052,000 at December 31, 2008. The Company did not repurchase any shares in
2008.
The following table presents
information with respect to Bancorp’s stock repurchase program:
|
|
|
Shares
repurchased in
|
|
Cost
of shares
|
|
Average cost per
|
|
|
(Shares and
dollars in thousands, except per share)
|
period
|
|
repurchased
|
|
share
|
|
|
Prior to year end 2006
|
3,623
|
|
|
60,503
|
|
|
16.70
|
|
|
Year ended
2007
|
205
|
|
|
5,847
|
|
|
28.52
|
|
|
Year ended 2008
|
-
|
|
|
-
|
|
|
-
|
|
|
Plan to date total
|
3,828
|
|
$
|
66,350
|
|
$
|
17.33
|
The Federal Reserve and Federal
Deposit Insurance Corporation (“FDIC”) have established minimum requirements for
capital adequacy for bank holding companies and member banks. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Bancorp and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off balance sheet
items. The Federal Reserve and FDIC risk based capital guidelines require banks
and bank holding companies to have a ratio of Tier 1 capital to total risk
weighted assets of at least 4%, and a ratio of total capital to total risk
weighted assets of 8% or greater. In addition, the leverage ratio of Tier 1
capital to total average assets less intangibles is required to be at least 3%.
Bancorp and its bank subsidiary’s capital components, classification, risk
weightings and other factors are also subject to qualitative judgments by
regulators. Failure to meet minimum capital requirements can initiate certain
action by regulators that, if undertaken, could have a material effect on
Bancorp’s financial statements. As of December 31, 2008, Bancorp and its
subsidiary bank are considered “Well Capitalized” under current risk based
capital regulatory guidelines, which require well capitalized banks and bank
holding companies to maintain Tier 1 capital of at least 6%, total risk based
capital of at least 10% and a leverage ratio of at least 5%. Management believes
that no events or changes in conditions have subsequently occurred which would
significantly change Bancorp’s capital position. Payment of dividends by the
Company and the Bank is subject to restriction by state and federal banking
regulators. During 2008, Bancorp determined to reduce its quarterly dividend to
$.01 per share beginning with the dividend declared in the third quarter of
2008.
The following table presents
selected risk adjusted capital information as of December 31, 2008 and 2007:
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
required
|
|
|
|
|
|
|
|
|
|
|
Percent
required
|
|
|
|
|
|
|
|
|
|
|
Amount Required
|
|
for
Minimum
|
|
|
|
|
|
|
|
Amount Required
|
|
for
Minimum
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
For
Minimum
|
|
Capital
|
|
|
|
|
|
|
|
For
Minimum
|
|
Capital
|
|
|
|
|
Amount
|
|
Ratio
|
|
Capital Adequacy
|
|
Adequacy
|
|
Amount
|
|
Ratio
|
|
Capital Adequacy
|
|
Adequacy
|
|
|
Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast
Bancorp
|
|
$
|
236,601
|
|
9.96
|
%
|
|
$
|
95,015
|
|
4%
|
|
$
|
244,165
|
|
9.88
|
%
|
|
$
|
98,804
|
|
4%
|
|
|
West Coast Bank
|
|
|
229,167
|
|
9.66
|
%
|
|
|
94,911
|
|
4%
|
|
|
228,976
|
|
9.28
|
%
|
|
|
98,687
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bancorp
|
|
$
|
266,296
|
|
11.21
|
%
|
|
$
|
190,030
|
|
8%
|
|
$
|
275,306
|
|
11.15
|
%
|
|
$
|
197,608
|
|
8%
|
|
|
West Coast Bank
|
|
|
258,830
|
|
10.91
|
%
|
|
|
159,822
|
|
8%
|
|
|
260,080
|
|
10.54
|
%
|
|
|
197,373
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bancorp
|
|
$
|
236,601
|
|
9.46
|
%
|
|
$
|
75,035
|
|
3%
|
|
$
|
244,165
|
|
9.41
|
%
|
|
$
|
77,855
|
|
3%
|
|
|
West Coast Bank
|
|
|
229,167
|
|
9.17
|
%
|
|
|
74,946
|
|
3%
|
|
|
228,976
|
|
8.83
|
%
|
|
|
77,828
|
|
3%
|
81
15. BALANCES WITH THE FEDERAL RESERVE
BANK
The Bank
is required to maintain cash reserves or deposits with the Federal Reserve equal
to a percentage of reservable deposits. The average required reserves for the
Bank were $5.7 million and $5.0 million during the years ended December 31, 2008
and 2007, respectively.
16. EARNINGS (LOSS) PER SHARE
Basic
earnings 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 per share is computed in the
same manner as basic earnings per share except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if certain shares issuable upon exercise of options and non-vested
restricted stock were included.
The
following tables reconcile the numerator and denominator of the basic and
diluted earnings (loss) per share computations:
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
(Dollars and
shares in thousands, except per share data)
|
Net Income (loss)
|
|
Shares
|
|
Per Share Amount
|
|
|
|
|
|
|
For the year ended December 31,
2008
|
|
|
Basic earnings (loss)
|
$
|
(6,313
|
)
|
|
15,472
|
|
$
|
(0.41
|
)
|
|
|
Stock options
|
|
|
|
|
-
|
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
-
|
|
|
|
|
|
|
Diluted earnings
(loss)
(1)
|
$
|
(6,313
|
)
|
|
15,472
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
equivalent shares excluded due to anti-dilutive effect
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
2007
|
|
|
Basic earnings
|
$
|
16,842
|
|
|
15,507
|
|
$
|
1.09
|
|
|
|
Stock options
|
|
|
|
|
497
|
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
41
|
|
|
|
|
|
|
Diluted
earnings
|
$
|
16,842
|
|
|
16,045
|
|
$
|
1.05
|
|
|
|
|
|
|
Common stock equivalent shares excluded due to anti-dilutive
effect
|
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
2006
|
|
|
Basic earnings
|
$
|
29,260
|
|
|
15,038
|
|
$
|
1.95
|
|
|
|
Stock options
|
|
|
|
|
648
|
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
44
|
|
|
|
|
|
|
Diluted
earnings
|
$
|
29,260
|
|
|
15,730
|
|
$
|
1.86
|
|
|
|
|
|
|
Common stock equivalent shares excluded due to anti-dulitive
effect
|
|
|
|
|
99
|
|
|
|
|
Bancorp
had no reconciling items between net income (loss) and income available to
common stockholders for the periods reported.
82
17. COMPREHENSIVE INCOME (LOSS)
The following table displays the
components of other comprehensive income (loss) for the last three years:
|
|
(Dollars in
thousands)
|
Year ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
Net income (loss) as reported
|
$
|
(6,313
|
)
|
|
$
|
16,842
|
|
|
$
|
29,260
|
|
|
|
|
|
|
Unrealized holding gains (losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) arising during the year
|
|
(7,480
|
)
|
|
|
(291
|
)
|
|
|
541
|
|
|
|
Tax (provision) benefit
|
|
2,891
|
|
|
|
114
|
|
|
|
(213
|
)
|
|
|
Unrealized
holding gains (losses) arising during the year, net of tax
|
|
(4,589
|
)
|
|
|
(177
|
)
|
|
|
328
|
|
|
|
|
|
|
Unrealized (losses) gains on derivatives- cash flow
hedges
|
|
-
|
|
|
|
28
|
|
|
|
(6
|
)
|
|
|
Tax benefit
(provision)
|
|
-
|
|
|
|
(11
|
)
|
|
|
2
|
|
|
|
Unrealized (losses) gains on derivatives- cash flow hedges, net of
tax
|
|
-
|
|
|
|
17
|
|
|
|
(4
|
)
|
|
|
|
|
|
Less: Reclassification adjustment for impairment and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses on sales
of securities
|
|
5,558
|
|
|
|
67
|
|
|
|
686
|
|
|
|
Tax benefit
|
|
(2,136
|
)
|
|
|
(26
|
)
|
|
|
(269
|
)
|
|
|
Net realized losses, net of tax
|
|
3,422
|
|
|
|
41
|
|
|
|
417
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
$
|
(7,480
|
)
|
|
$
|
16,723
|
|
|
$
|
30,001
|
|
18. TIME DEPOSITS
Included
in time deposits are deposits in denominations of $100,000 or greater, totaling
$290.0 million and $287.1 million at December 31, 2008 and 2007, respectively.
Interest expense relating to time deposits in denominations of $100,000 or
greater was $10.5 million, $14.0 million and $9.8 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Maturity amounts on Bancorp’s
time deposits include $522.1 million in 2009, $38.9 million in 2010, $12.0
million in 2011, $10.2 million in 2012, and $1.1 million in 2013. Included in
the maturity amounts are $2.2 million in variable rate time deposits that
reprice monthly with maturities in the first quarter of 2009.
83
19. EMPLOYEE BENEFIT PLANS
West
Coast Bancorp employee benefits include a plan established under section 401(k)
of the Internal Revenue Code for certain qualified employees (the “401(k)
plan”). Employee contributions up to 100 percent of salaries under the Internal
Revenue Code guidelines can be made under the 401(k) plan, of which Bancorp may
match 50 percent of the employees’ contributions up to a maximum of three
percent of the employees’ eligible compensation. Bancorp did not make a matching
contribution for 2008. Bancorp may also elect to make discretionary
contributions to the plan. No discretionary matches were made in 2008, 2007 and
2006. Employees vest immediately in their own contributions and earnings, and
vest in Bancorp’s contributions over five years of eligible service. Bancorp had
no 401(k) plan related expenses in 2008, and $.94 million and $.82 million for
2007, and 2006, respectively, related to the Company’s 401(k) plan
match.
Bancorp
provides separate non-qualified deferred compensation plans for directors and
executive officers (collectively, “Deferred Compensation Plans”) as supplemental
benefit plans which permit directors and selected officers to elect to defer
receipt of all or any portion of their future salary, bonus or directors’ fees,
including with respect to officers, amounts they otherwise might not be able to
defer under the 401(k) plan due to specified Internal Revenue Code restrictions
on the maximum deferral that may be allowed under that plan. Under the plans, an
amount equal to compensation being deferred by participants is placed in a rabbi
trust, the assets of which are available to Bancorp’s creditors, and invested
consistent with the participants’ direction among a variety of investment
alternatives. A deferred compensation liability of $1.9 million was included in
other liabilities as of December 31, 2008, compared to $2.4 million at December
31, 2007.
Bancorp
has multiple supplemental executive retirement agreements with former and
current executives. The following table reconciles the accumulated liability for
the benefit obligation of these agreements:
|
|
(Dollars in
thousands)
|
Year ended December 31,
|
|
|
|
2008
|
|
2007
|
|
|
Beginning balance
|
$
|
2,223
|
|
|
$
|
1,978
|
|
|
|
Benefit
expense
|
|
293
|
|
|
|
344
|
|
|
|
Benefit payments
|
|
(160
|
)
|
|
|
(99
|
)
|
|
|
Ending
balance
|
$
|
2,356
|
|
|
$
|
2,223
|
|
Bancorp’s
obligations under supplemental executive retirement agreements are unfunded
plans and have no plan assets. The benefit obligation represents the vested net
present value of future payments to individuals under the agreements. Bancorp’s
benefit expense, as specified in the agreements for the entire year 2009, is
expected to be $.2 million. The benefits expected to be paid are presented in
the following table:
(Dollars
in thousands)
|
|
|
|
Benefits expected to
|
|
|
Year
|
|
be paid
|
|
|
2009
|
|
$
|
220
|
|
|
2010
|
|
|
185
|
|
|
2011
|
|
|
174
|
|
|
2012
|
|
|
167
|
|
|
2013
|
|
|
167
|
|
|
2014 through
2018
|
|
|
835
|
84
20. STOCK PLANS
At
December 31, 2008, Bancorp maintains multiple stock option plans. Bancorp’s
stock option plans include the 2002 Stock Incentive Plan (“2002 Plan”), the 1999
Stock Option Plan and the 1995 Directors Stock Option Plan. No additional grants
may be made under plans other than the 2002 Plan. The 2002 Plan, which is
shareholder approved, permits the grant of stock options and restricted stock
awards for up to 1.9 million shares, of which 229,000 shares remain available
for issuance, of which 56,000 shares may be allocated to restricted stock
awards.
All
stock options have an exercise price that is equal to the closing fair market
value of Bancorp’s stock on the date the options were granted. Options granted
under the 2002 Plan generally vest over a three or four-year vesting period;
however, certain grants have been made that vested immediately. Stock options
have a ten-year maximum term. Options previously issued under the 1999 or prior
plans are fully vested. 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 related vesting term.
The
following table presents information on stock options outstanding for the
periods shown:
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Avg.
Ex.
|
|
|
|
Avg.
Ex.
|
|
|
|
Avg.
Ex.
|
|
|
2008 Common Shares
|
|
Price
|
|
2007 Common Shares
|
|
Price
|
|
2006 Common Shares
|
|
Price
|
|
Balance, beginning of year
|
1,311,585
|
|
|
$
|
16.97
|
|
1,470,036
|
|
|
$
|
16.61
|
|
1,693,135
|
|
|
$
|
14.80
|
|
Granted
|
178,000
|
|
|
|
12.73
|
|
11,900
|
|
|
|
31.53
|
|
157,775
|
|
|
|
27.65
|
|
Exercised
|
(2,622
|
)
|
|
|
9.46
|
|
(161,834
|
)
|
|
|
14.36
|
|
(366,893
|
)
|
|
|
12.83
|
|
Forfeited/expired
|
(79,448
|
)
|
|
|
17.56
|
|
(8,517
|
)
|
|
|
25.17
|
|
(13,981
|
)
|
|
|
21.71
|
|
Balance, end of year
|
1,407,515
|
|
|
$
|
16.41
|
|
1,311,585
|
|
|
$
|
16.97
|
|
1,470,036
|
|
|
$
|
16.61
|
|
Exercisable, end
of year
|
1,150,201
|
|
|
|
|
|
1,099,940
|
|
|
|
|
|
1,151,694
|
|
|
|
|
As
of December 31, 2008, outstanding stock options consist of the following:
|
|
|
|
|
|
Weighted Avg.
|
|
Weighted
Avg.
|
|
|
|
Weighted Avg.
|
|
|
Exercise Price
Range
|
|
Options
Outstanding
|
|
Exercise Price
|
|
Remaining Life
|
|
Options Exercisable
|
|
Exercise Price
|
|
|
$
|
8.44
|
-
|
$
|
12.27
|
|
370,035
|
|
$
|
10.56
|
|
1.72
|
|
368,535
|
|
$
|
10.56
|
|
|
|
12.50
|
-
|
|
14.67
|
|
390,766
|
|
|
13.71
|
|
5.75
|
|
234,866
|
|
|
14.35
|
|
|
|
15.09
|
-
|
|
21.32
|
|
481,240
|
|
|
19.30
|
|
5.30
|
|
453,395
|
|
|
19.22
|
|
|
|
21.92
|
-
|
|
34.13
|
|
165,474
|
|
|
27.46
|
|
7.26
|
|
93,405
|
|
|
27.04
|
|
|
Total
|
|
|
|
|
|
1,407,515
|
|
$
|
16.41
|
|
4.71
|
|
1,150,201
|
|
$
|
16.09
|
The
average fair value of stock options granted is estimated on the date of grant
using the Black-Scholes option-pricing model. There were no non-qualified
director stock options granted in 2007. The following table presents the
assumptions used in the fair value calculation:
|
|
|
Non-Qualified Director Options
|
|
Employee Options
|
|
|
|
2008
|
|
2006
|
|
2008
|
|
2007
|
|
2006
|
|
|
Risk Free interest rates
|
|
2.75
|
%
|
|
|
4.95
|
%
|
|
|
2.75%-3.52
|
%
|
|
|
4.44%-4.78
|
%
|
|
|
4.35%-5.13
|
%
|
|
|
Expected
dividend
|
|
3.60
|
%
|
|
|
1.64
|
%
|
|
|
3.60%-4.18
|
%
|
|
|
1.48%-1.66
|
%
|
|
|
1.44%-1.65
|
%
|
|
|
Expected lives, in years
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
Expected
volatility
|
|
27
|
%
|
|
|
23
|
%
|
|
|
27
|
%
|
|
|
23
|
%
|
|
|
23
|
%
|
|
|
Fair value of options granted
|
$
|
2.20
|
|
|
$
|
6.12
|
|
|
$
|
2.20
|
|
|
$
|
6.80
|
|
|
$
|
6.15
|
|
85
20. STOCK PLANS (continued)
The following table presents
information on stock options outstanding for the periods shown, less estimated
forfeitures:
|
(Dollars in
thousands, except share and per share data)
|
Year ended
December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Intrinsic value of options exercised in the period
|
$
|
6
|
|
$
|
2,706
|
|
$
|
6,227
|
|
|
|
Stock options fully vested and expected to vest:
|
|
|
|
|
|
|
|
|
|
Number
|
|
1,375,273
|
|
|
1,235,652
|
|
|
1,453,658
|
|
Weighted average exercise price
|
$
|
16.10
|
|
$
|
16.85
|
|
$
|
16.51
|
|
Aggregate intrinsic value
|
$
|
-
|
|
$
|
2,044
|
|
$
|
26,350
|
|
Weighted average contractual term of options
|
|
4.7 years
|
|
|
4.9 years
|
|
|
5.7 years
|
|
|
|
Stock options vested and currently exercisable
|
|
|
|
|
|
|
|
|
|
Number
|
1,150,201
|
|
|
1,099,940
|
|
|
1,151,694
|
|
Weighted average exercise price
|
$
|
16.09
|
|
$
|
15.47
|
|
$
|
14.55
|
|
Aggregate intrinsic value
|
$
|
-
|
|
$
|
4,385
|
|
$
|
23,132
|
|
Weighted average contractual term of options
|
|
3.9 years
|
|
|
4.4 years
|
|
|
4.9 years
|
Bancorp
grants restricted stock periodically as a part of the 2002 Plan for the benefit
of employees and directors. Restricted stock grants are made at the discretion
of the Board of Directors, except with regard to grants to Bancorp’s Section 16
officers, which are made at the discretion of the Board’s Compensation &
Personnel Committee. Compensation expense for restricted stock is based on the
market price of the Company stock at the date of the grant and amortized on a
straight-line basis over the vesting period which is currently one, three or
four years for all grants. Recipients of restricted stock do not pay any cash
consideration to the Company for the shares, have the right to vote all shares
subject to such grant and receive all dividends with respect to such shares,
whether or not the shares have vested, except in the case of performance awards
granted in 2008 for which dividends are collected and will be forfeited if
performance conditions are not met. Restrictions are generally based upon
continuous service, except that performance awards vest based on achievement of
performance targets based on the Company’s stock price.
Restricted stock consists of the
following for the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
2008
Restricted
|
|
Grant
Date
|
|
2007
Restricted
|
|
Grant
Date
|
|
2006
Restricted
|
|
Grant
Date
|
|
|
Shares
|
|
Fair Value
|
|
Shares
|
|
Fair Value
|
|
Shares
|
|
Fair Value
|
|
Balance, beginning of year
|
148,317
|
|
|
$
|
27.97
|
|
123,746
|
|
|
$
|
24.22
|
|
123,027
|
|
|
$
|
20.24
|
|
Granted
|
127,900
|
|
|
|
11.48
|
|
74,170
|
|
|
|
31.68
|
|
57,840
|
|
|
|
27.67
|
|
Vested
|
(59,949
|
)
|
|
|
26.53
|
|
(47,583
|
)
|
|
|
23.93
|
|
(55,715
|
)
|
|
|
19.07
|
|
Forfeited
|
(5,500
|
)
|
|
|
26.26
|
|
(2,016
|
)
|
|
|
30.09
|
|
(1,406
|
)
|
|
|
22.47
|
|
Balance, end of year
|
210,768
|
|
|
$
|
18.41
|
|
148,317
|
|
|
$
|
27.97
|
|
123,746
|
|
|
$
|
24.22
|
|
|
|
Weighted avg. remaining recognition period
|
1.40 years
|
|
|
|
|
|
1.34 years
|
|
|
|
|
|
1.41 years
|
|
|
|
|
The
following table presents stock-based compensation expense and professional
expense related to restricted stock and stock options for the periods shown:
|
|
Twelve months ended December 31,
|
|
(Dollars in
thousands)
|
2008
|
|
2007
|
|
2006
|
|
Restricted stock expense
|
$
|
2,301
|
|
$
|
1,530
|
|
$
|
1,044
|
|
Stock option
expense
|
|
564
|
|
|
500
|
|
|
597
|
|
Total stock-based compensation and professional
expense
|
$
|
2,865
|
|
$
|
2,030
|
|
$
|
1,641
|
|
|
|
Tax benefit recognized on share-based expense
|
$
|
1,089
|
|
$
|
771
|
|
$
|
624
|
The
balance of unearned compensation related to unvested restricted stock granted as
of December 31, 2008 and 2007 was $2.2 million and $3.1 million, respectively.
The December 31, 2008 unearned compensation balance is expected to be recognized
over a weighted average period of 1.4 years.
86
21. FAIR VALUE MEASUREMENT
SFAS No.
157, “Fair Value Measurements” defines fair value and establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. The following definitions
describe the categories used in the tables presented under Fair Value
Measurement.
-
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 assumptions about
the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the
circumstances.
Financial
instruments are broken down in the tables that follow by recurring or
nonrecurring measurement status. Recurring assets are initially measured at fair
value and are required to be remeasured 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 remeasured at
fair value after initial recognition in the financial statements at some time
during the reporting period.
The following table presents fair
value measurements for assets that are measured at fair value on a recurring
basis subsequent to initial recognition:
|
|
|
|
Fair value measurements at December 31,
2008, using
|
|
|
|
|
|
|
Quoted prices in active
|
|
Other
observable
|
|
Significant unobservable
|
|
|
Total
fair value
|
|
markets for identical assets
|
|
inputs
|
|
inputs
|
|
(Dollars in
thousands)
|
December 31, 2008
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Trading securities
|
$
|
1,546
|
|
$
|
1,546
|
|
$
|
-
|
|
$
|
-
|
|
Available for
sale securities
|
|
198,515
|
|
|
223
|
|
|
188,772
|
|
|
9,520
|
|
Total recurring assets measured at fair value
|
$
|
200,061
|
|
$
|
1,769
|
|
$
|
188,772
|
|
$
|
9,520
|
The Company did not have any
transfers between level 1, level 2, or level 3 instruments during the period. In
2008, the Company changed its valuation technique for its pooled trust preferred
investments in our corporate securities portfolio from using a pricing service
to a discounted cash flow method. These securities were measured using level 3
inputs for the entire year 2008. The Company had no other valuation technique
changes in recurring and nonrecurring assets measured at fair value from the
year ended December 31, 2007.
The
following table represents a reconciliation from the beginning of the period to
end of the period of level three instruments, for assets that are measured at
fair value on a recurring basis:
|
|
Available for sale
|
|
(Dollars in
thousands)
|
securities
|
|
Fair value, January 1, 2008
|
$
|
13,948
|
|
|
Losses included in other comprehensive income
(loss)
|
|
(1,918
|
)
|
|
Fair value, March 31, 2008
|
|
12,030
|
|
|
Losses included in other comprehensive income
(loss)
|
|
(1,012
|
)
|
|
Fair value, June 30, 2008
|
|
11,018
|
|
|
Reclassification for losses from adjustment for
impairment of securities
|
|
3,144
|
|
|
Losses included in other comprehensive income (loss)
|
|
(4,952
|
)
|
|
Fair value,
September 30, 2008
|
|
9,210
|
|
|
Gains included in other comprehensive income (loss)
|
|
310
|
|
|
Fair value,
December 31, 2008
|
$
|
9,520
|
|
The
losses from adjustments for OTTI of securities were recognized in noninterest
income in the consolidated income statement.
87
21. FAIR VALUE MEASUREMENT (continued)
The following method was used to estimate the fair value of each class of
financial instrument:
Trading
securities
–
Trading assets held at
December 31, 2008, are related solely to bonds, equity securities and mutual
funds held in a Rabbi Trust for the benefit of the Company’s deferred
compensation plans. Fair values for trading assets are based on quoted market
prices.
Available for Sale
Securities
-
Fair values for available for
sale securities are based on quoted market prices when available or through the
use of alternative approaches, such as matrix or model pricing, indicators from
market makers, or discounted cash flows when market quotes are not readily
accessible or available. Our level three assets consist primarily of pooled
trust preferred securities.
Certain
assets and liabilities are measured at fair value on a nonrecurring basis after
initial recognition such as loans held for sale, loans measured for impairment
and OREO. During 2008, certain 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 2008. During 2008, certain loans included
in Bancorp’s loan portfolio were deemed impaired in accordance with SFAS No.
114, “Accounting by Creditors for Impairment of a Loan.” OREO that was taken
into possession during 2008 was measured at estimated fair value less sales
expense. In addition, during 2008, certain properties were written down $4.8
million to reflect additional decreases in their fair market value after initial
recognition at the time the property was placed into OREO. These valuation write
downs were recorded in OREO sales and valuation adjustments in the statements of
income (loss).
There
were no nonrecurring level one or two fair value measurements in 2008. The
following table represents the level three fair value measurements for
nonrecurring assets:
|
(Dollars in
thousands)
|
Impairment
|
|
Fair Value
|
|
Loans held for sale
|
$
|
-
|
|
$
|
2,860
|
|
Loans measured
for impairment
|
|
56,563
|
|
|
221,197
|
|
OREO
|
|
4,785
|
|
|
65,492
|
|
Total
nonrecurring assets measured at fair value
|
$
|
61,348
|
|
$
|
289,549
|
The
following methods were used to estimate the fair value of each class of
financial instrument above:
Loans held for
sale
- Loans held for sale are carried at the lower of cost or market
utilizing the quoted market price. Due to the short duration of time between
origination and sale, the carrying value of the loans held for sale approximates
its market value. When a loan is sold, the gain is recognized in the
consolidated statement of income as the proceeds less the book value of the loan
including unamortized fees and capitalized direct costs.
Impaired loans
- A loan is considered
to be impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due (both interest and
principal) according to the contractual terms of the loan agreement. Impaired
loans are measured based on the present value of expected future cash flows
discounted at the loan’s effective interest rate or, as a practical expedient,
at the loan’s observable market price or the fair market value of the collateral
less sales expenses if the loan is collateral dependent. A significant portion
of the Bank’s impaired loans are measured using the fair market value of the
collateral less sales expenses.
Other real estate
owned
- OREO is initially recorded at the lower of the carrying amount of the
loan or fair value of the property less estimated costs to sell. This amount
becomes the property’s new basis. Management considers third party appraisals as
well as independent fair market value assessments from realtors or persons
involved in selling OREO in determining the fair value of particular properties.
Accordingly, the valuation of OREO is subject to significant external and
internal judgment. Management also periodically reviews OREO to determine
whether the property continues to be carried at the lower of its recorded book
value or fair value, net of estimated costs to sell.
88
22. 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 or purchased, 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 highly 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. In addition, fair values established utilizing alternative valuation
techniques may or may not be substantiated by comparison with independent
markets. 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.
Investment Securities - For securities held for investment purposes, fair
values are based on quoted market prices or dealer quotes. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities or other modeling techniques. See Note 21, “Fair Value
Measurement” of the notes to consolidated financial statements for more detail.
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.
Bank
owned life insurance - The carrying amount is the cash surrender value of all
policies, which approximates fair value.
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 deposit 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 fixed 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. Because these commitments are
generally unassignable by either the borrower or us, they only have value to the
borrower and us.
89
22. FAIR VALUES OF FINANCIAL
INSTRUMENTS (continued)
The estimated
fair values of financial instruments at December 31, 2008, are as follows:
|
|
(Dollars in
thousands)
|
Carrying Value
|
|
Fair Value
|
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
64,778
|
|
$
|
64,778
|
|
|
Trading assets
|
|
1,546
|
|
|
1,546
|
|
|
Investment
securities
|
|
198,515
|
|
|
198,515
|
|
|
Net loans (net of allowance for loan losses
|
|
|
|
|
|
|
|
and including
loans held for sale)
|
|
2,038,736
|
|
|
1,915,769
|
|
|
Bank owned life
insurance
|
|
23,525
|
|
|
23,525
|
|
|
|
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
Deposits
|
$
|
2,024,379
|
|
$
|
2,030,079
|
|
|
Short-term borrowings
|
|
132,000
|
|
|
132,000
|
|
|
Long-term
borrowings
|
|
91,059
|
|
|
94,049
|
|
|
|
|
|
Junior subordinated debentures-variable
|
|
45,000
|
|
|
23,921
|
|
|
Junior
subordinated debentures-fixed
|
|
6,000
|
|
|
4,041
|
The estimated
fair values of financial instruments at December 31, 2007 are as follows:
|
|
(Dollars in
thousands)
|
Carrying Value
|
|
Fair Value
|
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
113,802
|
|
$
|
113,802
|
|
|
Trading assets
|
|
1,582
|
|
|
1,582
|
|
|
Investment
securities
|
|
259,130
|
|
|
259,130
|
|
|
Net loans (net of allowance for loan losses
|
|
|
|
|
|
|
|
and including
loans held for sale)
|
|
2,128,939
|
|
|
2,151,108
|
|
|
Bank owned life
insurance
|
|
22,612
|
|
|
22,612
|
|
|
|
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
Deposits
|
$
|
2,094,832
|
|
$
|
2,095,529
|
|
|
Short-term borrowings
|
|
167,000
|
|
|
167,000
|
|
|
Long-term
borrowings
|
|
83,100
|
|
|
83,914
|
|
|
|
|
|
Junior subordinated debentures-variable
|
|
37,500
|
|
|
37,500
|
|
|
Junior
subordinated debentures-fixed
|
|
13,500
|
|
|
13,530
|
90
23. FINANCIAL INSTRUMENTS WITH OFF
BALANCE SHEET RISK
The Bank
has financial instruments with off balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the Consolidated Balance Sheets.
The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as for on-balance sheet instruments. As of December 31,
2008, outstanding commitments consist of the following:
|
|
|
Contract or
|
|
Contract or
|
|
|
|
Notional Amount
|
|
Notional Amount
|
|
|
(Dollars in
thousands)
|
December 31, 2008
|
|
December 31, 2007
|
|
|
Financial instruments whose contract amounts represent credit
risk:
|
|
|
|
|
|
|
|
Commitments to
extend credit in the form of loans
|
|
|
|
|
|
|
|
Commercial
|
$
|
348,428
|
|
$
|
395,203
|
|
|
Real estate construction
|
|
|
|
|
|
|
|
Two-step loans
|
|
152
|
|
|
78,585
|
|
|
Other than two-step loans
|
|
52,845
|
|
|
149,833
|
|
|
Total real estate construction
|
|
52,997
|
|
|
228,418
|
|
|
Real estate mortgage
|
|
|
|
|
|
|
|
Standard mortgage
|
|
2,251
|
|
|
7,320
|
|
|
Home equity line of credit
|
|
190,122
|
|
|
198,331
|
|
|
Total real estate mortgage loans
|
|
192,373
|
|
|
205,651
|
|
|
Commercial real estate
|
|
18,916
|
|
|
27,116
|
|
|
Installment and consumer
|
|
15,779
|
|
|
19,232
|
|
|
Other
(1)
|
|
8,251
|
|
|
24,223
|
|
|
Standby letters of credit and financial guarantees
|
|
14,030
|
|
|
8,081
|
|
|
Account
overdraft protection instruments
|
|
59,175
|
|
|
54,093
|
|
|
Total
|
$
|
709,949
|
|
$
|
962,017
|
|
(1)
|
|
The category “other” represents commitments extended to
clients or borrowers that have been extended but not yet fully executed.
These other extended commitments are not yet classified nor have they been
placed into our loan system.
|
Commitments to extend credit are agreements to lend to a customer, as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Many of the commitments may expire without
being drawn upon, therefore total commitment amounts do not necessarily
represent future cash requirements. Each customer’s creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management’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.
Standby
letters of credit are conditional commitments issued to support a customer’s
performance or payment obligation to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
Interest
rates on residential 1-4 family mortgage loan applications are typically rate
locked during the application stage for periods ranging from 15 to 45 days, the
most typical period being 30 days. These loans are locked with various qualified
investors under a best-efforts delivery program. The Company makes every effort
to deliver these loans before their rate locks expire. This arrangement
generally requires the Bank to deliver the loans prior to the expiration of the
rate lock. Delays in funding the loans may require a lock extension. The cost of
a lock extension at times is borne by the borrower and at times by the Bank.
These lock extension costs paid by the Bank are not expected to have a material
impact to operations. This activity is managed daily.
91
24. PARENT COMPANY ONLY FINANCIAL DATA
The following
sets forth the condensed financial information of West Coast Bancorp on a
stand-alone basis:
|
|
WEST COAST
BANCORP
|
|
|
UNCONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
As of December 31 (Dollars in
thousands)
|
2008
|
|
2007
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,031
|
|
$
|
4,102
|
|
|
Investment in bank subsidiary
|
|
241,701
|
|
|
244,047
|
|
|
Investment in other subsidiaries
|
|
4,152
|
|
|
3,708
|
|
|
Other assets
|
|
3,948
|
|
|
11,977
|
|
|
Total assets
|
$
|
251,832
|
|
$
|
263,834
|
|
|
|
|
|
Liabilities and stockholders’ equity:
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
$
|
51,000
|
|
$
|
51,000
|
|
|
Other liabilities
|
|
2,645
|
|
|
4,593
|
|
|
Total liabilities
|
|
53,645
|
|
|
55,593
|
|
|
Stockholders’ equity
|
|
198,187
|
|
|
208,241
|
|
|
Total liabilities and stockholders’ equity
|
$
|
251,832
|
|
$
|
263,834
|
|
|
WEST COAST
BANCORP
|
|
|
UNCONSOLIDATED STATEMENTS OF INCOME (LOSS)
|
|
|
|
|
|
Year ended December 31 (Dollars in
thousands)
|
2008
|
|
2007
|
|
2006
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends from Bank
|
$
|
6,000
|
|
|
$
|
7,000
|
|
$
|
7,000
|
|
|
Other income
|
|
10
|
|
|
|
10
|
|
|
65
|
|
|
Total income
|
|
6,010
|
|
|
|
7,010
|
|
|
7,065
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
2,635
|
|
|
|
3,612
|
|
|
2,774
|
|
|
Other expense
|
|
869
|
|
|
|
699
|
|
|
650
|
|
|
Total expense
|
|
3,504
|
|
|
|
4,311
|
|
|
3,424
|
|
|
Income before income taxes and equity in undistributed
|
|
|
|
|
|
|
|
|
|
|
|
earnings of the subsidiaries
|
|
2,506
|
|
|
|
2,698
|
|
|
3,641
|
|
|
Income tax
benefit
|
|
1,363
|
|
|
|
1,678
|
|
|
1,310
|
|
|
Net income before equity in undistributed earnings
|
|
|
|
|
|
|
|
|
|
|
|
of
the subsidiaries
|
|
3,869
|
|
|
|
4,376
|
|
|
4,951
|
|
|
Equity in
undistributed earnings (loss) of the subsidiaries
|
|
(10,182
|
)
|
|
|
12,466
|
|
|
24,309
|
|
|
Net
income (loss)
|
$
|
(6,313
|
)
|
|
$
|
16,842
|
|
$
|
29,260
|
92
24. PARENT COMPANY ONLY FINANCIAL DATA
(continued)
|
|
WEST COAST
BANCORP
|
|
|
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
Year ended December 31 (Dollars in
thousands)
|
2008
|
|
2007
|
|
2006
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
|
(6,313
|
)
|
|
$
|
16,842
|
|
|
$
|
29,260
|
|
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed (earnings) loss of subsidiaries
|
|
10,182
|
|
|
|
(12,466
|
)
|
|
|
(24,309
|
)
|
|
|
(Increase) decrease in other assets
|
|
(1,805
|
)
|
|
|
(2,295
|
)
|
|
|
(3,441
|
)
|
|
|
Increase in other liabilities
|
|
5
|
|
|
|
415
|
|
|
|
686
|
|
|
|
Stock based compensation expense
|
|
2,865
|
|
|
|
2,030
|
|
|
|
1,641
|
|
|
|
Net
cash provided by operating activities
|
|
4,934
|
|
|
|
4,526
|
|
|
|
3,837
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of Mid-Valley Bank stock
|
|
-
|
|
|
|
-
|
|
|
|
(5,009
|
)
|
|
|
Capital contribution to subsidiaries
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
(7,500
|
)
|
|
|
Net
cash used in investing activities
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
(12,509
|
)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of junior subordinated
notes
|
|
-
|
|
|
|
17,500
|
|
|
|
20,000
|
|
|
|
Redemption from maturity of junior subordinated notes
|
|
-
|
|
|
|
(7,500
|
)
|
|
|
(5,000
|
)
|
|
|
Net activity in common stock of deferred compensation
plans
|
|
(50
|
)
|
|
|
(84
|
)
|
|
|
(166
|
)
|
|
|
Proceeds from issuance of common stock
|
|
25
|
|
|
|
2,325
|
|
|
|
4,707
|
|
|
|
Redemption of common stock related to equity
plans
|
|
(190
|
)
|
|
|
(639
|
)
|
|
|
(1,082
|
)
|
|
|
Tax
benefit (expense) associated with equity plans
|
|
(287
|
)
|
|
|
853
|
|
|
|
1,875
|
|
|
|
Repurchase of common stock
|
|
-
|
|
|
|
(5,847
|
)
|
|
|
(2,770
|
)
|
|
|
Dividends paid and cash paid for fractional shares
|
|
(6,503
|
)
|
|
|
(7,765
|
)
|
|
|
(6,596
|
)
|
|
|
Other, net
|
|
-
|
|
|
|
17
|
|
|
|
(17
|
)
|
|
|
Net cash provided by (used in) financing
activities
|
|
(7,005
|
)
|
|
|
(1,140
|
)
|
|
|
10,951
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
(2,071
|
)
|
|
|
(1,614
|
)
|
|
|
2,279
|
|
|
|
Cash and cash
equivalents at beginning of year
|
|
4,102
|
|
|
|
5,716
|
|
|
|
3,437
|
|
|
|
Cash and cash equivalents at end of year
|
$
|
2,031
|
|
|
$
|
4,102
|
|
|
$
|
5,716
|
|
During
the year ending December 31, 2008, the Parent Company made a non-cash capital
contribution of $9.83 million to the Bank in the form of an intercompany tax
settlement.
93
25. 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 use of accounting, human resources, data processing and
marketing services provided by the Bank, West Coast Trust, and the holding
company. All other accounting policies are the same as those described in the
summary of significant accounting policies.
Summarized financial information concerning Bancorp’s reportable segments
and the reconciliation to Bancorp’s consolidated results is shown in the
following table. The “Other” column includes West Coast Trust’s operations and
holding company related items including activity relating to trust preferred
securities. Investment in subsidiaries is netted out of the presentations below.
The “Intercompany” column identifies the intercompany activities of revenues,
expenses and other assets, between the “Banking” and “Other” segment.
|
|
|
As
of and for the year ended
|
|
|
(Dollars in
thousands)
|
December 31, 2008
|
|
|
|
Banking
|
|
Other
|
|
Intercompany
|
|
Consolidated
|
|
|
Interest
income
|
$
|
140,767
|
|
|
$
|
79
|
|
|
$
|
-
|
|
|
$
|
140,846
|
|
|
|
Interest expense
|
|
46,061
|
|
|
|
2,635
|
|
|
|
-
|
|
|
|
48,696
|
|
|
|
Net interest income (expense)
|
|
94,706
|
|
|
|
(2,556
|
)
|
|
|
-
|
|
|
|
92,150
|
|
|
|
Provision for credit losses
|
|
40,367
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,367
|
|
|
|
Noninterest
income
|
|
22,429
|
|
|
|
3,329
|
|
|
|
(1,129
|
)
|
|
|
24,629
|
|
|
|
Noninterest expense
|
|
87,836
|
|
|
|
3,616
|
|
|
|
(1,129
|
)
|
|
|
90,323
|
|
|
|
Loss before income taxes
|
|
(11,068
|
)
|
|
|
(2,843
|
)
|
|
|
-
|
|
|
|
(13,911
|
)
|
|
|
Benefit for income taxes
|
|
(6,489
|
)
|
|
|
(1,109
|
)
|
|
|
-
|
|
|
|
(7,598
|
)
|
|
|
Net loss
|
$
|
(4,579
|
)
|
|
$
|
(1,734
|
)
|
|
$
|
-
|
|
|
$
|
(6,313
|
)
|
|
|
|
|
|
Depreciation and amortization
|
$
|
4,493
|
|
|
$
|
27
|
|
|
$
|
-
|
|
|
$
|
4,520
|
|
|
|
Assets
|
$
|
2,511,006
|
|
|
$
|
9,470
|
|
|
$
|
(4,336
|
)
|
|
$
|
2,516,140
|
|
|
|
Goodwill
|
$
|
13,059
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,059
|
|
|
|
Loans,
net
|
$
|
2,035,876
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,035,876
|
|
|
|
Deposits
|
$
|
2,027,899
|
|
|
$
|
-
|
|
|
$
|
(3,520
|
)
|
|
$
|
2,024,379
|
|
|
|
Equity
|
$
|
241,701
|
|
|
$
|
(43,514
|
)
|
|
$
|
-
|
|
|
$
|
198,187
|
|
|
|
|
|
|
|
|
|
|
As
of and for the year ended
|
|
|
(Dollars in
thousands)
|
December 31, 2007
|
|
|
|
Banking
|
|
Other
|
|
Intercompany
|
|
Consolidated
|
|
|
Interest
income
|
$
|
183,067
|
|
|
$
|
123
|
|
|
$
|
-
|
|
|
$
|
183,190
|
|
|
|
Interest expense
|
|
64,857
|
|
|
|
3,613
|
|
|
|
-
|
|
|
|
68,470
|
|
|
|
Net interest income (expense)
|
|
118,210
|
|
|
|
(3,490
|
)
|
|
|
-
|
|
|
|
114,720
|
|
|
|
Provision for credit losses
|
|
38,956
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,956
|
|
|
|
Noninterest
income
|
|
30,724
|
|
|
|
3,721
|
|
|
|
(947
|
)
|
|
|
33,498
|
|
|
|
Noninterest expense
|
|
82,466
|
|
|
|
3,780
|
|
|
|
(947
|
)
|
|
|
85,299
|
|
|
|
Income (loss) before income taxes
|
|
27,512
|
|
|
|
(3,549
|
)
|
|
|
-
|
|
|
|
23,963
|
|
|
|
Provision (benefit) for income taxes
|
|
8,505
|
|
|
|
(1,384
|
)
|
|
|
-
|
|
|
|
7,121
|
|
|
|
Net income (loss)
|
$
|
19,007
|
|
|
$
|
(2,165
|
)
|
|
$
|
-
|
|
|
$
|
16,842
|
|
|
|
|
|
|
Depreciation and amortization
|
$
|
4,719
|
|
|
$
|
28
|
|
|
$
|
-
|
|
|
$
|
4,747
|
|
|
|
Assets
|
$
|
2,641,630
|
|
|
$
|
10,937
|
|
|
$
|
(5,953
|
)
|
|
$
|
2,646,614
|
|
|
|
Goodwill
|
$
|
13,059
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,059
|
|
|
|
Loans,
net
|
$
|
2,125,752
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,125,752
|
|
|
|
Deposits
|
$
|
2,100,018
|
|
|
$
|
-
|
|
|
$
|
(5,186
|
)
|
|
$
|
2,094,832
|
|
|
|
Equity
|
$
|
244,047
|
|
|
$
|
(35,806
|
)
|
|
$
|
-
|
|
|
$
|
208,241
|
|
94
25. SEGMENT AND RELATED INFORMATION
(continued)
|
|
|
|
As
of and for the year ended
|
|
|
(Dollars in
thousands)
|
|
December 31, 2006
|
|
|
|
|
Banking
|
|
Other
|
|
Intercompany
|
|
Consolidated
|
|
|
Interest income
|
|
$
|
150,706
|
|
$
|
92
|
|
|
$
|
-
|
|
|
$
|
150,798
|
|
|
Interest
expense
|
|
|
47,151
|
|
|
2,775
|
|
|
|
-
|
|
|
|
49,926
|
|
|
Net
interest income (expense)
|
|
|
103,555
|
|
|
(2,683
|
)
|
|
|
-
|
|
|
|
100,872
|
|
|
Provision for
credit losses
|
|
|
2,733
|
|
|
-
|
|
|
|
-
|
|
|
|
2,733
|
|
|
Noninterest income
|
|
|
25,733
|
|
|
3,243
|
|
|
|
(880
|
)
|
|
|
28,096
|
|
|
Noninterest
expense
|
|
|
79,065
|
|
|
3,480
|
|
|
|
(880
|
)
|
|
|
81,665
|
|
|
Income (loss) before income taxes
|
|
|
47,490
|
|
|
(2,920
|
)
|
|
|
-
|
|
|
|
44,570
|
|
|
Provision
(benefit) for income taxes
|
|
|
16,449
|
|
|
(1,139
|
)
|
|
|
-
|
|
|
|
15,310
|
|
|
Net
income (loss)
|
|
$
|
31,041
|
|
$
|
(1,781
|
)
|
|
$
|
-
|
|
|
$
|
29,260
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
3,685
|
|
$
|
171
|
|
|
$
|
-
|
|
|
$
|
3,856
|
|
|
Assets
|
|
$
|
2,460,705
|
|
$
|
12,134
|
|
|
$
|
(7,467
|
)
|
|
$
|
2,465,372
|
|
|
Goodwill
|
|
$
|
13,059
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,059
|
|
|
Loans,
net
|
|
$
|
1,924,673
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,924,673
|
|
|
Deposits
|
|
$
|
2,013,136
|
|
$
|
-
|
|
|
$
|
(6,784
|
)
|
|
$
|
2,006,352
|
|
|
Equity
|
|
$
|
227,186
|
|
$
|
(26,304
|
)
|
|
$
|
-
|
|
|
$
|
200,882
|
26. RELATED PARTY
TRANSACTIONS
As of December 31, 2008 and 2007,
the Bank had loan commitments to directors, senior officers, principal
stockholders and their related interests totaling $26.7 million and $20.9
million, respectively. These commitments and the loan balances below were made
substantially on the same terms in the course of ordinary banking business,
including interest rates, maturities and collateral as those made to other
customers of the Bank.
The
following table presents a summary of outstanding balances for loans made to
directors, senior officers, and principal stockholders of the Company and their
related interests:
|
|
(Dollars in
thousands)
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
Balance, beginning of period
|
$
|
18,890
|
|
|
$
|
8,556
|
|
|
|
New loans and
advances
|
|
21,775
|
|
|
|
10,423
|
|
|
|
Principal payments and payoffs
|
|
(17,804
|
)
|
|
|
(89
|
)
|
|
|
Balance, end of
period
|
$
|
22,861
|
|
|
$
|
18,890
|
|
95
27. QUARTERLY FINANCIAL INFORMATION
(unaudited)
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands, except per share data)
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
|
Interest income
|
$
|
32,017
|
|
|
$
|
34,772
|
|
|
$
|
35,745
|
|
$
|
38,312
|
|
|
Interest
expense
|
|
10,880
|
|
|
|
11,049
|
|
|
|
12,032
|
|
|
14,735
|
|
|
Net
interest income
|
|
21,137
|
|
|
|
23,723
|
|
|
|
23,713
|
|
|
23,577
|
|
|
Provision for
credit losses
|
|
16,517
|
|
|
|
9,125
|
|
|
|
6,000
|
|
|
8,725
|
|
|
Noninterest income
|
|
4,310
|
|
|
|
1,070
|
|
|
|
9,038
|
|
|
10,211
|
|
|
Noninterest
expense
|
|
22,535
|
|
|
|
22,221
|
|
|
|
23,346
|
|
|
22,221
|
|
|
Income (loss) before income taxes
|
|
(13,605
|
)
|
|
|
(6,553
|
)
|
|
|
3,405
|
|
|
2,842
|
|
|
Provision
(benefit) for income taxes
|
|
(4,924
|
)
|
|
|
(4,237
|
)
|
|
|
721
|
|
|
842
|
|
|
Net
income (loss)
|
$
|
(8,681
|
)
|
|
$
|
(2,316
|
)
|
|
$
|
2,684
|
|
$
|
2,000
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)
|
$
|
(0.56
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.17
|
|
$
|
0.13
|
|
|
Diluted (loss)
|
$
|
(0.56
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.17
|
|
$
|
0.13
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands, except per share data)
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
|
Interest income
|
$
|
45,528
|
|
|
$
|
47,742
|
|
|
$
|
46,148
|
|
$
|
43,772
|
|
|
Interest
expense
|
|
17,253
|
|
|
|
17,905
|
|
|
|
17,424
|
|
|
15,888
|
|
|
Net
interest income
|
|
28,275
|
|
|
|
29,837
|
|
|
|
28,724
|
|
|
27,884
|
|
|
Provision for
credit losses
|
|
29,956
|
|
|
|
2,700
|
|
|
|
3,500
|
|
|
2,800
|
|
|
Noninterest income
|
|
8,615
|
|
|
|
8,145
|
|
|
|
8,705
|
|
|
8,033
|
|
|
Noninterest
expense
|
|
20,160
|
|
|
|
22,602
|
|
|
|
21,500
|
|
|
21,037
|
|
|
Income (loss) before income taxes
|
|
(13,226
|
)
|
|
|
12,680
|
|
|
|
12,429
|
|
|
12,080
|
|
|
Provision
(benefit) for income taxes
|
|
(5,739
|
)
|
|
|
4,350
|
|
|
|
4,294
|
|
|
4,216
|
|
|
Net
income (loss)
|
$
|
(7,487
|
)
|
|
$
|
8,330
|
|
|
$
|
8,135
|
|
$
|
7,864
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)
|
$
|
(0.48
|
)
|
|
$
|
0.54
|
|
|
$
|
0.52
|
|
$
|
0.51
|
|
|
Diluted (loss)
|
$
|
(0.48
|
)
|
|
$
|
0.52
|
|
|
$
|
0.50
|
|
$
|
0.49
|
96
|
ITEM
9.
|
CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
.
|
None.
ITEM 9A
.
CONTROLS AND
PROCEDURES
Disclosure Controls and Procedures
Our disclosure
controls and procedures are designed to ensure that information the Company must
disclose in its reports filed or submitted under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms. Our
management has evaluated, with the participation and under the supervision of
our chief executive officer (“CEO”) and chief financial officer (“CFO”), the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered
by this report. Based on this evaluation, our CEO and CFO have concluded that,
as of such date, the Company’s disclosure controls and procedures are effective
in ensuring that information relating to the Company, including its consolidated
subsidiaries, required to be disclosed in reports that it files under the
Exchange Act is (1) recorded, processed, summarized and reported within the time
periods specified in the 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.
Material Changes in Internal Control
over Financial Reporting
During
fourth quarter 2008, the Company took steps to correct a control deficiency
identified in its quarterly report on Form 10-Q for the quarter ended September
30, 2008. The Company evaluated and confirmed the effectiveness of its review
process for preparation of the Company’s financial statements. It also took
steps to enhance the technical competencies of personnel performing these review
procedures and it reassigned certain review responsibilities to more senior
level accounting personnel. As a result, the Company believes that it addressed
the material weakness in internal control over financial reporting that existed
as of September 30, 2008. There were no other material changes in internal
control over financial reporting.
Management’s Report on Internal
Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company’s internal control system
is designed to provide reasonable assurance regarding the preparation,
reliability and fair presentation of published financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America. Management is also responsible for ensuring compliance
with the federal laws and regulations concerning loans to insiders and the
federal and state laws and regulations concerning dividend restrictions, both of
which are designated by the Federal Deposit Insurance Corporation (“FDIC”) as
safety and soundness laws and regulations. Nonetheless, all internal control
systems, no matter how well designed, have inherent limitations. Even systems
determined to be effective as of a particular date can provide only reasonable
assurance with respect to financial statement preparation and presentation and
may not eliminate the need for restatements.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in
Internal Control—Integrated Framework
. Based on our assessment, we believe that, as of December 31,
2008, the Company’s internal control over financial reporting is effective based
on those criteria.
The
Company’s management has assessed its compliance with the designated safety and
soundness laws and regulations and has maintained records of its determinations
and assessments as required by the FDIC. Based on this assessment, management
believes that West Coast Bancorp has complied, in all material respects, with
the designated safety and soundness laws and regulations for the year ended
December 31, 2008.
The
Company’s independent registered public accounting firm has audited the
Company’s internal control over financial reporting as of December 31, 2008, as
stated in their report appearing below.
97
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
West Coast Bancorp
Lake Oswego, Oregon
We have audited the internal control
over financial reporting of West Coast Bancorp and subsidiaries (the “Company”)
as of December 31, 2008, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Because management’s assessment and our audit were
conducted to meet the reporting requirements of Section 112 of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment
and our audit of the Company’s internal control over financial reporting
included controls over the preparation of the schedules equivalent to the basic
financial statements in accordance with instructions for the Consolidated
Financial Statements for Bank Holding Companies (Form FR Y-9C). The Company’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying management’s
report on internal control over financial reporting and compliance with
designated laws and regulations. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over
financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of the inherent limitations of
internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on the criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have not examined and, accordingly,
we do not express an opinion or any other form of assurance on management’s
statement referring to compliance with laws and regulations.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended
December 31, 2008, of the Company and our report dated February 23, 2009,
expressed an unqualified opinion on those financial statements.
|
/s/ DELOITTE &
TOUCHE LLP
|
|
|
|
Portland,
Oregon
|
|
February 23,
2009
|
98
ITEM 9B.
OTHER
INFORMATION
None.
99
PART III
ITEM 10
.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information
concerning directors and executive officers of Bancorp required to be included
in this item is set forth under the headings “Election of Directors,” “Section
16(a) Beneficial Ownership Reporting Compliance,” and “Management” in Bancorp’s
Proxy Statement for its 2008 Annual Meeting of Stockholders to be filed within
120 days of Bancorp’s fiscal year end of December 31, 2008 (the “Proxy
Statement”), and is incorporated into this report by reference.
Audit and Compliance
Committee
Bancorp has a separately-designated standing Audit and Compliance
Committee established in accordance with Section 3(a)(58)(A) of the Exchange
Act. The members of the Audit and Compliance Committee are Duane C. McDougall
(Chair), Nancy Wilgenbusch and Michael Bragg, each of whom is independent as
independence for audit committee members is defined under NASDAQ listing
standards applicable to the Company.
Audit Committee Financial
Expert
Bancorp’s Board of Directors has determined that Duane C. McDougall, the
Audit and Compliance Committee chair, is an audit committee financial expert as
defined in Item 407(d)(5) of Regulation S-K of the Exchange Act and is
independent as independence for audit committee members is defined under NASDAQ
listing standards applicable to the Company.
Code of Ethics
We have adopted a code of ethics (the “Code of Ethics”), for our CEO,
CFO, principal accounting officer, and persons performing similar functions,
entitled the West Coast Bancorp Code of Ethics for Senior Financial Officers.
The Code of Ethics is available on our website at www.wcb.com under the tab for
investor relations. Stockholders may request a free copy of the Code of Ethics
from:
|
|
West Coast
Bancorp
|
|
|
Attention:
Secretary
|
|
|
5335 Meadows Road,
Suite 201
|
|
|
Lake Oswego, Oregon
97035
|
|
|
(503)
684-0884
|
ITEM 11
.
EXECUTIVE
COMPENSATION
Information concerning executive and director compensation and certain
matters regarding participation in Bancorp’s compensation committee required by
this item is set forth under the headings “Executive Compensation” and “Board of
Directors” in the Proxy Statement and is incorporated into this report by
reference.
100
|
ITEM
12
.
|
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK HOLDER MATTERS
|
Security Ownership
Information
concerning the security ownership of certain beneficial owners and management
required by this item is set forth under the heading “Security Ownership of
Certain Beneficial Owners and Management” in the Proxy Statement and is
incorporated into this report by reference.
Equity Compensation Plan
Information
Information concerning Bancorp’s equity compensation plans, including
both stockholder approved plans and non-stockholder approved plans, required by
this item is set forth under the heading “Executive Compensation—Equity
Compensation Plan Information” in the Proxy Statement and is incorporated into
this report by reference.
|
ITEM
13
.
|
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Certain Relationships and Related
Transactions
Information concerning certain relationships and related transactions
required by this item is set forth under the heading “Transactions with Related
Persons” in the Proxy Statement and is incorporated into this report by
reference.
Director Independence
Information concerning the independence of Bancorp directors required by
this item is set forth under the heading “Election of Directors” in the Proxy
Statement and is incorporated into this report by reference.
ITEM 14
.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Information
concerning fees paid to our accountants required by this item is included under
the heading “Matters Related to our Auditors—Fees Paid to Independent Registered
Public Accounting Firm” in the Proxy Statement and is incorporated into this
report by reference.
101
PART IV
ITEM 15
.
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
|
(a)(1)
Financial Statements:
|
|
|
|
|
|
The financial statements and
related documents listed in the Index set forth in Item 8 of this report
are filed as part of this report.
|
|
|
|
|
|
(2)
Financial Statements Schedules:
|
|
|
|
|
|
All other schedules to the
consolidated financial statements are omitted because they are not
applicable or not material or because the information is included in the
consolidated financial statements or related notes in Item 8 above.
|
|
|
|
|
|
(3)
Exhibits:
|
|
|
|
|
|
The response to this portion of
Item 15 is submitted as a separate section of this report appearing
immediately following the signature page and entitled “Index to
Exhibits.”
|
102
SIGNATURES
Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on February 23, 2009.
|
|
WEST COAST
BANCORP
|
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
By:
|
/s/ Robert D. Sznewajs
|
|
|
|
Robert D. Sznewajs
|
|
|
|
President and CEO
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on February 23, 2009.
|
Principal
Executive Officer:
|
|
|
|
/s/ Robert D. Sznewajs
|
|
President and CEO and
Director
|
|
Robert D.
Sznewajs
|
|
|
|
Principal
Financial Officer:
|
|
|
|
/s/ Anders Giltvedt
|
|
Executive Vice
President and Chief Financial Officer
|
|
Anders
Giltvedt
|
|
|
|
Principal
Accounting Officer:
|
|
|
|
/s/ Kevin M. McClung
|
|
Senior Vice President
and Controller
|
|
Kevin M.
McClung
|
|
|
|
Remaining
Directors:
|
|
|
|
*Lloyd D.
Ankeny, Chairman
|
|
|
|
*Michael J.
Bragg
|
|
|
|
*Duane C.
McDougall
|
|
|
|
*Steven J.
Oliva
|
|
|
|
*J.F.
Ouderkirk
|
|
|
|
*Steven N.
Spence
|
|
|
|
*David J.
Truitt
|
|
|
|
*Nancy A.
Wilgenbusch, PhD.
|
|
|
|
*By
|
/s/ Robert D. Sznewajs
|
|
|
|
|
Robert D. Sznewajs
|
|
|
|
|
Attorney-in-Fact
|
|
|
|
|
|
|
103
Index to Exhibits
|
Exhibit No.
|
|
Exhibit
|
|
|
3.1
|
|
Restated Articles of Incorporation. Incorporated by
reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2003 (the “2003 10-K”).
|
|
|
|
3.2
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|
Amended and Restated Bylaws of the Company (as amended
through January 27, 2009).
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4
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|
The Company has incurred long-term indebtedness as to
which the amount involved is less than ten percent of the total assets of
the Company and its subsidiaries on a consolidated basis. The Company
agrees to furnish instruments relating to such indebtedness to the
Commission upon its request.
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10.1
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|
Form of Indemnification Agreement for all directors and
executive officers.*
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10.2
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|
Change in Control Agreement between the Company and
Robert D. Sznewajs dated January 1, 2004, and amended and restated
December 30, 2008.*
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10.3
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|
Change in Control Agreement between the Company and
Anders Giltvedt dated January 1, 2004, and amended and restated December
30, 2008.*
|
|
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10.4
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|
Change in Control Agreement between the Company and
Xandra McKeown dated January 1, 2004, and amended and restated December
30, 2008.*
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|
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10.5
|
|
Change in Control Agreement between the Company and
James D. Bygland dated January 1, 2004 and amended and restated December
30, 2008.*
|
|
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10.6
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|
Change in Control Agreement between the Company and
Hadley Robbins dated March 5, 2007 and amended and restated December 30,
2008.*
|
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10.7
|
|
Supplemental Executive Retirement Plan adopted by West
Coast Bank, the Company and Robert D. Sznewajs dated August 1, 2003, and
amended and restated as of January 1, 2009
.
*
|
|
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|
10.8
|
|
Supplemental Executive Retirement Plan adopted by West
Coast Bank, the Company and Anders Giltvedt dated August 1
,
2003, and amended
and restated as of January 1, 2009.*
|
|
|
|
10.9
|
|
Supplemental Executive Retirement Plan adopted by West
Coast Bank, the Company and Xandra McKeown dated August 1, 2003, and
amended and restated as of January 1, 2009.*
|
|
|
|
10.10
|
|
Supplemental Executive Retirement Plan adopted by West
Coast Bank, the Company and James D. Bygland dated August 1, 2003, and
amended and restated as of January 1, 2009.*
|
|
|
|
10.11
|
|
Supplemental Executive Retirement Plan adopted by West
Coast Bank, the Company and Hadley Robbins dated April 1, 2007, and
amended and restated as of January 1,
2009.*
|
*Indicates a management contract or
compensatory plan, contract or arrangement.
104
Index to Exhibits (continued)
|
Exhibit No.
|
|
Exhibit
|
|
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10.12
|
|
401(k) Profit Sharing Plan. Incorporated by reference to
Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (Reg. No.
333-01649) filed March 12, 1996.*
|
|
|
|
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10.13
|
|
Directors’ Deferred Compensation Plan.*
|
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|
|
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|
10.14
|
|
Executives’ Deferred Compensation Plan.*
|
|
|
|
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10.15
|
|
Directors’ Stock Option Plan and Form of Agreement.
Incorporated by Reference to Exhibits 99.1 and 99.2 to the Company’s
Registration Statement on Form S-8 (Reg. No. 033-60259) filed June 15,
1995 (the “1995 S-8”).*
|
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|
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10.16
|
|
1999 Stock Option Plan and Form of Agreement.
Incorporated by reference to Exhibits 99.1 and 99.2 to the Company’s
Registration Statement on Form S-8 (Reg. No. 333-86113) filed August 30,
1999.*
|
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|
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10.18
|
|
2002 Stock Incentive Plan, as amended. Incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2006 (the “September 2006
10-Q”).*
|
|
|
|
10.19
|
|
Forms of Option Agreements, Restricted Stock Agreements
and Restricted Stock Performance Award Agreement under the 2002 Stock
Incentive Plan. Incorporated by reference to Exhibits 10.3 through 10.7 to
the September 2006 10-Q and Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2008.
|
|
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|
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10.20
|
|
Employment Agreement dated effective as of January 1,
2008, between Robert D. Sznewajs and the Company
.
Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated December 20,
2007.*
|
|
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21
|
|
Subsidiaries of the Company.
|
|
|
|
|
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23
|
|
Consent of Deloitte & Touche LLP.
|
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|
|
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24
|
|
Power of Attorney.
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer under Section
302 of the Sarbanes-Oxley Act.
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer under Section
302 of the Sarbanes-Oxley Act.
|
|
|
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief
Financial Officer under Section 906 of the Sarbanes-Oxley
Act.
|
*Indicates a management contract or
compensatory plan, contract or arrangement.
105
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