Capital Position and Shareholder Cash Dividend

As shown in Table 6 below, the December 31, 2012, capital position improved from year end 2011. The Company declared a shareholder dividend of $0.05 per share on December 11, 2012. The dividend will be payable on January 31, 2013, to shareholders of record on January 10, 2013.
 
Table 6          
CAPITAL RATIOS
           
  Dec. 31, Dec. 31,   Sept. 30,  
  2012 2011 Change 2012  Change 
West Coast Bancorp          
Tier 1 risk-based capital ratio 20.66% 19.36%  1.30 20.45%  0.21
Total risk-based capital ratio 21.83% 20.62%  1.21 21.62%  0.21
Leverage ratio 15.60% 14.61%  0.99 15.48%  0.12
           
West Coast Bank          
Tier 1 risk-based capital ratio 19.95% 18.66%  1.29 19.80%  0.15
Total risk-based capital ratio 21.20% 19.92%  1.28 21.06%  0.14
Leverage ratio 15.07% 14.09%  0.98 15.00%  0.07
 

Operating Results

As shown in Table 7 below, pretax income, excluding merger-related expenses, in the fourth quarter of 2012 was $9.6 million compared to pre-tax income of $0.1 million in the final quarter last year. The improvement was driven by higher net interest and noninterest income, with significant reductions in noninterest expense and the provision for credit losses in the most recent quarter. Net interest income in the fourth quarter of 2011 was reduced by a $4.4 million charge in conjunction with prepayments of Federal Home Loan Bank ("FHLB") term borrowings. For sequential quarters, pretax income, excluding merger-related expenses, declined modestly due to a benefit for credit losses in the third quarter of 2011 and lower net interest and noninterest income in the most recent quarter. Noninterest expense declined 8% linked quarters. Fourth quarter 2012 net income of $6.5 million, excluding merger-related expenses, declined from $17.8 million in the final quarter of 2011, when the Company fully reversed its deferred tax asset valuation allowance. See Table 1 for reconciliation of pretax income and net income non-GAAP financial measures.
 
Table 7              
SUMMARY INCOME STATEMENT EXCLUDING MERGER-RELATED EXPENSES
(Dollars in thousands) Q4 Q4 Change Q3 Change
  2012 2011 $ % 2012 $ %
               
 Net interest income  $ 21,435  $ 17,940  $ 3,495 19%  $ 21,687  $ (252) -1%
 Provision (benefit) for credit losses   13  1,499  (1,486) -99%  (593)  606 102%
 Noninterest income   7,274  6,419  855 13%  8,172  (898) -11%
 Noninterest expense excluding merger-related expenses   19,083  22,744  (3,661) -16%  20,729  (1,646) -8%
 Income before income taxes excluding merger-related expenses   9,613  116  9,497 8187%  9,723  (110) -1%
 Provision (benefit) for income taxes excluding the tax impact of merger-related expenses  3,097  (17,646)  20,743 118%  3,403  (306) -9%
 Net income excluding merger-related expenses   $ 6,516  $ 17,762  $ (11,246) -63%  $ 6,320  $ 196 3%
 

As shown in Table 8 below, adjusted for the prepayment charge in the corresponding quarter in 2011, the net interest margin of 3.72% declined 16 basis points year over year fourth quarter. The decline in the net interest margin was a result of declining yield on the investment and loan portfolios only partially offset by lower rates on interest bearing deposits and FHLB borrowings. The same factors reduced the net interest margin 8 basis points on a linked-quarter basis.
 
Table 8          
NET INTEREST SPREAD AND MARGIN
(Annualized, tax-equivalent basis) Q4 Q4   Q3  
  2012 2011 Change 2012 Change
Yield on average interest-earning assets 3.89% 4.16%  (0.27) 3.97%  (0.08)
Rate on average interest-bearing liabilities 0.28% 1.58%  (1.30) 0.29%  (0.01)
Net interest spread 3.61% 2.58%  1.03 3.68%  (0.07)
Net interest margin 3.72% 3.13%  0.59 3.80%  (0.08)
           
Impact of FHLB prepayment premium in Q4 2011  --  -0.75%  0.75  --   -- 
Net interest margin excluding FHLB prepayment premium 3.72% 3.88%  (0.16) 3.80%  (0.08)
           
1 The fourth quarter 2011 rate on average interest-bearing liabilities includes 75 basis points of expense associated with the prepayment of FHLB borrowings.
 

As shown in Table 9 below, fourth quarter 2012 total noninterest income of $7.3 million increased $0.9 million or 13% from the same quarter in 2011. The increase was principally attributed to a $1.2 million decrease in Other Real Estate Owned ("OREO") valuation adjustments. On a linked-quarter basis, noninterest income declined $0.9 million with reductions across all major categories.
 
Table 9              
NONINTEREST INCOME
(Dollars in thousands) Q4 Q4 Change Q3 Change
  2012 2011 $ % 2012 $ %
 Noninterest income               
 Service charges on deposit accounts   $ 2,769  $ 3,005  $ (236) -8%  $ 3,017  $ (248) -8%
 Payment systems-related revenue   3,016  3,081  (65) -2%  3,073  (57) -2%
 Trust and investment services revenues   1,077  1,114  (37) -3%  1,231  (154) -13%
 Gains on sales of loans   346  300  46 15%  492  (146) -30%
 Gains on sales of securities   --   192  (192) -100%  --   --  0%
 Other-than-temporary impairment losses   --   --   --  0%  --   --  0%
 Other   818  708  110 16%  816  2 0%
 Total   8,026  8,400  (374) -4%  8,629  (603) -7%
               
 OREO gains (losses) on sale   35  (57)  92 161%  29  6 21%
 OREO valuation adjustments   (787)  (1,924)  1,137 59%  (486)  (301) -62%
 Total net loss on OREO   (752)  (1,981)  1,229 62%  (457)  (295) -65%
               
 Total noninterest income   $ 7,274  $ 6,419  $ 855 13%  $ 8,172  $ (898) -11%
 

As shown in Table 10 below, the Company's fourth quarter 2012 total noninterest expense was $20.3 million. Excluding merger-related expenses, total noninterest expense fell $3.6 million or 16% from the fourth quarter in 2011, which included $1 million in cost reduction related expenses. As a result of cost-savings initiatives implemented over the past eighteen months, expenses declined in all categories. On a linked-quarter basis, total noninterest expenses, excluding merger-related expenses, declined $1.6 million or 8%, with reductions across all categories except for occupancy expense. See Table 1 for reconciliation to GAAP measure. Fourth quarter 2012 merger-related expenses were comprised primarily of professional fees.
 
Table 10              
NONINTEREST EXPENSE
(Dollars in thousands) Q4 Q4 Change Q3 Change
  2012 2011 $ % 2012 $ %
 Noninterest expense               
 Salaries and employee benefits   $ 10,685  $ 12,614  $ (1,929) -15%  $ 11,499  $ (814) -7%
 Equipment   1,467  1,560  (93) -6%  1,480  (13) -1%
 Occupancy   2,084  2,162  (78) -4%  1,901  183 10%
 Payment systems-related expense   1,059  1,265  (206) -16%  1,148  (89) -8%
 Professional fees   468  1,122  (654) -58%  777  (309) -40%
 Postage, printing and office supplies   627  821  (194) -24%  735  (108) -15%
 Marketing   498  659  (161) -24%  520  (22) -4%
 Communications   394  395  (1) 0%  411  (17) -4%
 Other noninterest expense   1,801  2,146  (345) -16%  2,258  (457) -20%
 Total noninterest expense excluding merger-related expenses   $ 19,083  $ 22,744  $ (3,661) -16%  $ 20,729  $ (1,646) -8%
               
 Merger-related expenses   1,194  --   1,194 0%  578  616 107%
 Total noninterest expense   $ 20,277  $ 22,744  $ (2,467) -11%  $ 21,307  $ (1,030) -5%
 

Income Taxes

In the fourth quarter of 2012, the provision for income taxes was $2.7 million compared to a benefit for income taxes of $17.6 million in the final quarter of 2011 when the Company fully reversed its deferred tax asset valuation. The fourth quarter 2012 provision for income taxes was the result of an effective tax rate of 34.3% on pretax income for the full year.

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