UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K




[X] Annual Report
Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of
1934




For the fiscal year
ended December 31, 2009




Commission file number
0-10997




WEST COAST BANCORP (Exact name of registrant as specified in its
charter)








Oregon
            93-0810577(State or other jurisdiction
            I.R.S. Employer Identification
      Numberof incorporation or
    organization)





5335 Meadows Road –
Suite 201, Lake Oswego, Oregon 97035 (Address of principal executive offices)(Zip code)





(503)
684-0884 (Registrant’s
telephone number, including area code)




Securities registered
pursuant to Section 12(b) of the Act: Common Stock(Title of
Class)Securities registered pursuant to Section 12(g) of the Act: None




Indicate by check
mark whether the registrant is a well known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes [   ] No [X]




Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act. Yes [   ] No [X]




Indicate by check
mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [  
]




Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[   ]




Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See definition of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act (check one):




[   ]
      Large Accelerated Filer
            [   ]
      Accelerated Filer
            [   ]
      Non-accelerated Filer
            [X] Smaller
      Reporting Company





Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes [   ] No [X]




The aggregate market
value of registrant’s Common Stock held by non-affiliates of the registrant on
June 30, 2009, was approximately $32,090,000.




The number of shares
of registrant’s Common Stock outstanding on January 31, 2010, was 87,082,715.




DOCUMENTS INCORPORATED BY REFERENCE




Portions of the West
Coast Bancorp Definitive Proxy Statement for the 2009 annual meeting of
shareholders of West Coast Bancorp are incorporated by reference into Part III
of this Form 10-K.




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Table of Contents




PART
      I
            
            
            PAGEForward Looking Statement
      Disclosure
            2Item 1.
            
            Business
            3Item 1A.
            
            Risk Factors
            11Item 1B.
            
            Unresolved Staff Comments
            15Item 2.
            
            Properties
            15Item 3.
            
            Legal Proceedings
            15Item 4.
            
            [Reserved]
            15PART
      IIItem 5.
            
            Market for Registrant’s Common Equity,
      Related Stockholder Mattersand Issuer Purchases of Equity
      Securities
            16Item 6.
            
            Selected Financial Data
            18Item 7.
            
            Management’s Discussion and Analysis of
      FinancialCondition and Results of
      Operations
            20Item 7A.
            
            Quantitative and Qualitative Disclosures about Market
Risk
            56Item 8.
            
            Financial Statements and Supplementary
      Data
            58Item 9.
            
            Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            96Item 9A.
            
            Controls and Procedures
            96Item 9B.
            
            Other Information
            98PART
    IIIItem 10.
            
            Directors, Executive Officers and Corporate Governance
            99Item 11.
            
            Executive Compensation
            99Item 12.
            
            Security Ownership of Certain Beneficial
      Owners and Management and Related Stockholder Matters
            100Item 13.
            
            Certain Relationships and Related
      Transactions, and Director Independence
            100Item 14.
            
            Principal Accountant Fees and Services
            100PART
    IVItem 15.
            
            Exhibits and Financial Statement Schedules
            101Signatures
            
            
            102Index to Exhibits
            
            103


i




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Forward Looking Statement Disclosure




Statements in this Annual Report of West Coast
Bancorp (“Bancorp” or the “Company”) regarding future events or performance are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 (the “PSLRA”) and are made pursuant to the safe
harbors of the PSLRA. The Company’s actual results could be quite different from
those expressed or implied by the forward-looking statements. Words such as
“could,” “may,” “should,” “plan,” “believes,” “anticipates,” “estimates,”
“predicts,” “expects,” “projects,” “potential,” or “continue,” or words of
similar import, often help identify “forward-looking statements,” which include
any statements that expressly or implicitly predict future events, results, or
performance. Factors that could cause events, results or performance to differ
from those expressed or implied by our forward-looking statements include, among
others, risks discussed in Item 1A, “Risk Factors” of this report, risks
discussed elsewhere in the text of this report, as well as the following
specific factors:


- General economic
  conditions, whether national or regional, and conditions in real estate
  markets, that may affect the demand for our loan and other products, lead to
  further declines in credit quality and additional loan losses, negatively
  affect the value and salability of the real estate that we own or is the
  collateral for many of our loans and hinder our ability to increase lending
  activities;
- Changing bank regulatory conditions, policies, or programs, whether
  arising as new legislation or regulatory initiatives or changes in our
  regulatory classifications, that could lead to restrictions on activities of
  banks generally or West Coast Bank (the “Bank”) in particular, increased
  costs, including deposit insurance premiums, the elimination or expiration of
  programs expanding deposit insurance coverage, regulation or prohibition of
  certain income producing activities, or changes in the secondary market for
  bank loan and other products;
- Competitive factors, including competition with community, regional and
  national financial institutions, that may lead to pricing pressures that
  reduce yields the Bank earns on loans and increase rates the Bank pays on
  deposits, the loss of our most valued customers, defection of key employees or
  groups of employees, or other losses;
- Increasing or
  decreasing interest rate environments, including the slope and level of the
  yield curve, that could lead to decreases in net interest margin, lower net
  interest and fee income, including lower gains on sales of loans, and changes
  in the value of the Company’s investment securities;and
- Changes or failures in
  technology or third party vendor relationships in important revenue production
  or service areas or increases in required investments in technology that could
  reduce our revenues, increase our costs, or lead to disruptions in our
  business.



Furthermore, forward-looking statements are
subject to risks and uncertainties related to the Company’s ability to, among
other things: dispose of properties or other assets obtained through
foreclosures at expected prices and within a reasonable period of time; attract
and retain key personnel; generate loan and deposit balances at projected
spreads; sustain fee generation including gains on sales of loans; maintain
asset quality and control risk; limit the amount of net loan charge-offs; adapt
to changing customer deposit, investment and borrowing behaviors; control
expense growth; and monitor and manage the Company’s financial reporting,
operating and disclosure control environments.




Readers are cautioned not to place undue
reliance on our forward-looking statements, which reflect management’s analysis
only as of the date of the statements. The Company does not intend to publicly
revise or update forward-looking statements to reflect events or circumstances
that arise after the date of this report.




Readers should carefully review all
disclosures we file from time to time with the Securities and Exchange
Commission (“SEC”).




2




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PART I




ITEM 1. BUSINESS




General




West Coast Bancorp (“Bancorp” or the
“Company”) is a bank holding company headquartered in Lake Oswego, Oregon.
Bancorp’s principal business activities are conducted through its full-service,
commercial bank subsidiary, West Coast Bank (the “Bank”), an Oregon
state-chartered bank with deposits insured by the Federal Deposit Insurance
Corporation (“FDIC”). At December 31, 2009, the Bank had facilities in 43 cities
and towns in western Oregon and southwestern Washington, operating a total of 61
full-service and four limited-service branches and a Small Business
Administration (“SBA”) lending office in Vancouver, Washington. Bancorp also
owns West Coast Trust Company, Inc. (“West Coast Trust”), an Oregon trust
company that provides agency, fiduciary and other related trust
services.




Bancorp reports two principal operating
segments in the notes to its financial statements: West Coast Bank and West
Coast Trust and parent company related operations. For more information
regarding Bancorp’s operating segments, see Note 23 “Segment and Related
Information” to the Company’s audited consolidated financial statements included
under the section “Financial Statements and Supplementary Data” in Item 8 of
this report.




Bancorp experienced rapid growth during the
period 2002-2007. This growth period ended in late 2007, and Bancorp experienced
net losses of $6.3 million for 2008 and $91.2 million for 2009. The Bank’s
earliest and most significant losses to date arose out of its two-step
residential construction lending program (referred to in this report as the
“two-step loan program”). However, the Bank has experienced significant losses
in other loan portfolios as well, as the recession and severe slump in housing
and other real estate markets have taken a toll on the ability of the Bank’s
borrowers to repay loans and the value of the property that serves as collateral
for many of the Bank’s loans.




During 2008 and 2009, Bancorp and the Bank
took steps to preserve capital and sustain or improve regulatory capital ratios,
including through careful management of capital and reduction of risk weighted
assets. As a result of these and other factors, the Bank has seen a significant
reduction in the size of its loan portfolio and a dramatic increase in its
portfolio of investment securities, resulting in significant downward pressure
on Bancorp’s net interest income and margin.




In October 2009, Bancorp completed a private
capital raise (referred to in this report as, the "private capital raise") in
which it received net proceeds of $139.2 million in exchange for 1,428,849
shares of mandatorily convertible cumulative participating preferred stock,
Series A ("Series A Preferred Stock"), 121,328 shares of mandatorily convertible
cumulative participating preferred stock, Series B ("Series B Preferred Stock"),
and Class C Warrants exercisable for a total of 240,000 shares of Series B
Preferred Stock at a price of $100.00 per share (the "Class C Warrants"),
together with certain other warrants that expired unexercised when Bancorp
shareholders approved at a meeting held January 20, 2010, (i) an amendment to
Bancorp's Articles of Incorporation to increase Bancorp's authorized common
stock from 50,000,000 shares to 250,000,000 shares and (ii) conversion of the
preferred stock issued in the private capital raise into Common
Stock.




As a result of the shareholder
approvals:


- Shares of Series A
  Preferred Stock issued in the private capital raise were automatically
  converted into an aggregate of 71,442,450 shares of Common Stock on January
  27, 2010;
- Shares of Series B Preferred Stock issued in
  the private capital raise became automatically convertible into 6,066,400
  shares of Common Stock upon transfer of the preferred shares to third parties
  in a widely dispersed offering; and
- Shares of Series B Preferred Stock issuable
  upon exercise of the Class C Warrants became automatically convertible into
  12,000,000 shares of Common Stock following exercise of the Class C Warrants
  and transfer of the Series B Preferred Stock issuable there under to third
  parties in a widely dispersed offering.

The number of shares of Common Stock issuable
upon conversion of the Series B Preferred Stock and the number of shares of
Series B Preferred Stock issuable upon exercise of the Class C Warrants are
subject to adjustment in accordance with the terms of the Series B Preferred
Stock and Class C Warrants, respectively.




Regulatory capital ratios at the Bank improved
significantly as a result of Bancorp's contribution to the Bank in October 2009
of $134.2 million of proceeds from the private capital raise, improving the
Bank's operating flexibility. Bancorp's capital ratios similarly improved as a
result of the receipt of the shareholder approvals. Until that time, amounts
raised in the private capital raise did not qualify as capital at the holding
company level.




For more information regarding Bancorp’s
private capital raise, see the discussion under the subheading “Private Capital
Raise” in the “Overview” section included in Item 7 of this report.




3




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At December 31, 2009, Bancorp had total assets
of $2.73 billion, with total net loans of $1.69 billion and total investment
securities of $562.3 million. Bancorp’s total deposits at December 31, 2009,
were $2.15 billion and stockholders’ equity was $249.1 million. At December 31,
2008, Bancorp had total assets of $2.52 billion, total net loans of $2.04
billion and total investment securities of $198.5 million. Bancorp’s total
deposits at December 31, 2008, were $2.02 billion, with stockholders’ equity of
$198.2 million.




Bancorp and the Bank are parties to a
regulatory agreement and consent order with their respective regulators. For
more information regarding the regulatory agreement and consent order, see the
discussion under the subheading “Current Enforcement Actions” in the section
“Supervision and Regulation” included in Item 1 of this report.




West Coast Bank




West Coast Bank traces its origins
to a bank organized in 1925 under the name The Bank of Newport. The Bank in its
current form resulted from the merger on December 31, 1998, of the Bank of
Newport of Newport, Oregon, The Commercial Bank of Salem, Oregon, Bank of
Vancouver of Vancouver, Washington and Centennial Bank of Olympia, Washington,
into a single entity. This entity was re-named West Coast Bank. The Bank’s
headquarters are presently located in Lake Oswego, Oregon.




The Bank’s Oregon branches are
located in the following cities and towns: Beaverton, Bend (2), Canby,
Clackamas, Dallas, Depoe Bay, Dundee, 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).




The primary business strategy of the
Bank is to provide comprehensive banking and related financial services within
its local communities. The Bank emphasizes the diversity and accessibility of
its product lines and services and strives to provide products typically
associated with larger financial organizations, while maintaining the local
decision making authority, market knowledge and customer service orientation
typically associated with a community bank. The Bank focuses on four targeted
areas: 1) high value consumers (including the mature market), 2) small
businesses that desire streamlined packaged products, 3) commercial businesses
that benefit from customized lending, deposit and investment solutions and 4)
real estate finance including construction of commercial and residential
projects in addition to permanent financing for income producing properties.




For consumer banking customers, the Bank
offers a variety of checking and savings accounts, check cards, and 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. Consumer accounts consist of free checking and six other account
types, each specifically designed to meet the needs of a unique market segment.
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, and 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 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 Bank is committed to community banking and
intends the Bank to remain community-focused. Bancorp’s strategic vision
includes greater commercial banking market penetration, coupled with focused
distribution capability in targeted Pacific Northwest markets. The Bank intends
to grow its distribution and reach through expansion of its branch network in
target markets and through continued product expansion and use of new
technology, including a full range of transaction and payment system
capabilities.




West Coast Trust




West Coast Trust provides trust services and
life insurance products to individuals, for-profit and not for-profit businesses
and institutions. West Coast Trust acts as fiduciary of estates and
conservatorships, and as a trustee under various wills, trusts, and pension and
profit-sharing plans. The main office of West Coast Trust is located at 1000 SW
Broadway, Suite 1100, Portland, Oregon 97205, (503) 279-3911. The market value
of assets managed for others at December 31, 2009 was $304.5 million.




4




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West Coast Statutory Trusts III, IV, V, VI,
VII and VIII




West Coast Statutory Trusts III, IV, V, VI,
VII and VIII are wholly-owned subsidiary trusts of Bancorp formed to facilitate
the issuance of trust preferred securities. The trusts were organized in
September 2003, March 2004, April 2006, December 2006, March 2007 and June 2007,
respectively, in connection with six offerings of trust preferred securities. In
September 2009, the Company elected to defer interest payments related to all of
its trust preferred securities. As of December 31, 2009, the Company had accrued
$.7 million in deferred interest payable under the terms of these securities.
For more information regarding Bancorp’s issuance of trust preferred securities,
see Note 10 “Junior Subordinated Debentures” to the Company’s audited financial
consolidated statements included under the section “Financial Statements and
Supplementary Data” in Item 8 of this report.




Additional Information




Bancorp’s filings with the SEC, including its
annual report on Form 10-K, quarterly reports on Form 10-Q, periodic reports on
Form 8-K and amendments to these reports, are accessible free of charge at our
website at http://www.wcb.com  as soon as
reasonably practicable after filing with the SEC. By making this reference to
our website, we do not intend to incorporate into this report any information
contained in the website. The website should not be considered part of this
report.




The SEC maintains a website at http://www.sec.gov that contains reports, proxy
and information statements, and other information regarding issuers with
publicly traded securities, including the Company.




Employees




At December 31, 2009, Bancorp and
its subsidiaries had approximately 750 employees. None of these employees are
represented by labor unions. Management believes that Bancorp’s relationship
with its employees is good. Bancorp emphasizes a positive work environment for
its employees and our work environment is measured annually utilizing an
anonymous employee survey. Results continue to indicate a high level of employee
satisfaction. 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. In addition, during 2009, Chase Bank acquired the branches of
Washington Mutual, giving it a significant presence in our markets. 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. The 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. As a result of this distress, there may be opportunities to
acquire personnel, customers, branches or other assets in our market areas,
although Bancorp and the Bank are presently restricted by its regulatory
agreement and consent order from completing acquisitions. For more information
regarding the regulatory agreement and consent order, see the discussion under
the subheading “Current Enforcement Actions” in the section “Supervision and
Regulation” included in Item 1 of this report. Other financial institutions
aggressively compete against Bancorp in the market for expansion opportunities,
including acquisitions. Many of these institutions have no formal regulatory
restrictions, 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




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Supervision and Regulation




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 and, at
the state level, the Oregon Department of Consumer and Business Services
Division of Finance and Corporate Securities (the “DFCS”).




The laws and regulations applicable to Bancorp
and its subsidiaries are primarily intended to protect borrowers and depositors
of the Bank and not stockholders of Bancorp. Various proposals to change the
laws and regulations governing the banking industry are currently pending in
Congress, in the state legislatures and before the various bank regulatory
agencies. In the current economic climate and regulatory environment, there is a
high likelihood of enactment of new banking legislation and promulgation of new
banking regulations. The 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 the imposition of
regulatory enforcement actions, including assessment of civil money penalties.
During the past fiscal year, no civil money penalties have been imposed on
Bancorp, the Bank, or any of their respective directors, officers, or employees,
but Bancorp and the Bank have become the subject of regulatory enforcement
actions. For more information regarding our regulatory enforcement actions, see
the discussion under the subheading “Current Enforcement Actions” in this
section below.




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, 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 junior subordinated
debentures, cash dividends and operational expenses.




6




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Bank Regulation




General. The Bank
is an Oregon state-bank and is not a member of the Federal Reserve System. The
Bank conducts banking business in Oregon and Washington. The Bank is subject to
supervision and regulation by the DFCS, the FDIC and to a lesser extent, the
Washington Department of Financial Institutions. The Bank's regulators conduct
regular examinations of the Bank and have the authority to prohibit the Bank
from engaging in unsafe or unsound banking practices.




Deposit Insurance. Deposits maintained at the Bank are insured by the FDIC up to $250,000
per account owner through December 31, 2013. On January 1, 2014, 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 an assessment of 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 (the “TAG Program”), which is one of the
two primary components of the FDIC's Temporary Liquidity Guarantee Program (the
“TLGP Program”). Under the TAG Program, all qualifying noninterest-bearing
transaction accounts, IOLTA accounts, and certain NOW accounts are fully
guaranteed by the FDIC for the entire amount in the account. The TAG Program was
originally scheduled to expire on December 31, 2009 but was extended through
June 30, 2010, subject to the imposition of an increased assessment and
risk-based fee system on those entities participating in the extension. For the
six month extension period, the Bank will be subject to an annualized fee based
on its regulatory risk rating that will be assessed on its qualifying deposits
that exceed the existing FDIC deposit insurance limit of $250,000. Coverage
under the TAG Program is in addition to and separate from the coverage available
under the FDIC's general deposit insurance rules. Expiration of the TAG program
may have a material adverse effect on the Bank’s ability to grow, or even
retain, certain core deposits in excess of insurance limits. Such core deposits
are an important source of liquidity for the Bank.




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.




7




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Capital Adequacy Requirements




Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below minimum levels, the bank holding company or bank may, among other things,
be denied approval to acquire or establish additional banks or non-bank
businesses or to open new facilities.




The FDIC and Federal Reserve use risk-based
capital guidelines for banks and bank holding companies. Risk-based guidelines
are designed to make capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies, to account for off balance
sheet exposure and to minimize disincentives for holding liquid low-risk assets.
Assets and off balance sheet items are assigned to broad risk categories, each
with appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off balance sheet
items.




The guidelines are minimums and the Federal
Reserve may require that a banking organization maintain ratios in excess of the
minimums, particularly organizations contemplating significant expansion.
Current guidelines require all bank holding companies and federally-regulated
banks to maintain a minimum risk-based total capital ratio equal to 8%, of which
at least 4% must be Tier 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.




The Federal Reserve also monitors 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%.




For more information regarding the Bank and
Bancorp’s capital and leverage ratios, see the discussion under the section
“Capital Resources” in the Item 7 of this report. For more information regarding
regulatory enforcement actions, see the discussion under the subheading “Current
Enforcement Actions” in this section below.




The Federal Deposit Insurance Corporation
Improvement Act (“FDICIA”), among other things, created a statutory framework of
supervisory actions indexed to the capital level of the individual institution.
Under regulations adopted by the FDIC, an institution is assigned to one of five
capital categories - well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized - depending on
its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors such as an overall
assessment of the level and severity of problem and classified assets.
Undercapitalized, significantly undercapitalized, and critically
undercapitalized banks are subject to certain mandatory supervisory corrective
actions.




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.




Dividends




Substantially all of our activities are
conducted through the Bank. Consequently, as the parent company of the Bank, the
Company receives substantially all of its revenue as dividends from the Bank.
The banking regulators may prohibit banks and bank holding companies from paying
dividends that would constitute an unsafe or unsound banking practice. In
addition, a bank may not pay cash dividends if doing so would reduce the amount
of its capital below that necessary to meet minimum applicable regulatory
capital requirements. Oregon law also limits a bank's ability to pay
dividends.




Pursuant to a Consent Order with the FDIC
(described in greater detail below), the Bank is prohibited from paying cash
dividends without the prior consent of the FDIC and the DFCS. Additionally,
pursuant to a Written Agreement with the Federal Reserve, Bancorp is prohibited
from paying dividends and making payments of interest or principal on
subordinated indebtedness or trust preferred securities without the prior
consent of the Federal Reserve, the Director of Banking Supervision and
Regulation of the Board of Governors of the Federal Reserve System (the “Federal
Reserve Director”), and the DFCS. For more information regarding regulatory
enforcement actions, see the discussion under the subheading “Current
Enforcement Actions” in this section below.




Other Laws and Regulations




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, adequately capitalized and managed 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.




8




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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”) 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.




Electronic Funds Transfer Act & Regulation E - Recent
Developments. The
Electronic Funds Transfer Act (the "EFTA") provides a basic framework for
establishing the rights, liabilities, and responsibilities of consumers who use
electronic funds transfer ("EFT") systems. The EFTA is implemented by the
Federal Reserve's Regulation E, which governs transfers initiated through ATMs,
point-of-sale terminals, payroll cards, automated clearinghouse (ACH)
transactions, telephone bill-payment plans, or remote banking services.
Regulation E was recently amended to require consumers to opt in (affirmatively
consent) to participation in the Bank's overdraft service program for ATM and
one-time debit card transactions before overdraft fees may be assessed on the
consumer’s account. Notice of the opt-in right must be provided to all existing
and new customers who are consumers, and the customer's affirmative consent must
be obtained, before charges may be assessed on the consumer's account for paying
such overdrafts.




The new rule provides bank customers with an
ongoing right to revoke consent to participation in an overdraft service program
for ATM and one-time debit card transactions, as opposed to being automatically
enrolled in such a program. The new rule also prohibits banks from conditioning
the payment of overdrafts for checks, ACH transactions, or other types of
transactions that overdraw the consumer's account on the consumer's opting into
an overdraft service for ATM and one-time debit card transactions. For customers
who do not affirmatively consent to overdraft service for ATM and one-time debit
card transactions, a bank must provide those customers with the same account
terms, conditions, and features that it provides to consumers who do
affirmatively consent, except for the overdraft service for ATM and one-time
debit card transactions.




The mandatory compliance date for
the Regulation E amendments is July 1, 2010 provided that the Bank may continue
to assess overdraft service fees or charges on existing customer accounts prior
to August 15, 2010, without obtaining the consumer’s affirmative consent. The
Bank's compliance with the new Regulation E amendments may have a substantial
negative impact on the Bank's revenue from overdraft service fees and
non-sufficient funds (“NSF”) charges.




9




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Current Enforcement Actions




Bank Consent
Order. On October 26,
2009, Bancorp announced that the Bank had entered into a Stipulation and Consent
with the FDIC and the DFCS, agreeing to the issuance of an Order to Cease and
Desist (the “Consent Order”) effective as of October 22, 2009. The Consent Order
requires that the Bank, amongst other requirements:


- Achieve by December 31,
  2009, and maintain during the life of the Consent Order, a Tier I capital to
  total assets leverage ratio (“leverage ratio”) of not less than 10 percent and
  a total risk-based capital ratio of not less than 12 percent.
- Within 30 days of the
  Consent Order, eliminate from its books, by charge-off or collection, all
  assets classified “Loss”;
- Reduce assets classified
  “substandard” in relation to Tier I capital plus the allowance for loan losses
  to: (i) not more than 90 percent within 90 days of the Consent Order; (ii) not
  more than 70 percent within 180 days of the Consent Order; and (iii) not more
  than 50 percent within 270 days of the Consent Order, and to continue to
  reduce the volume of such assets after that date;
- Cease to extend
  additional credit to any borrower who has a loan or extension of credit with
  the Bank that is classified as “loss” or, without the approval of a majority
  of the Bank’s board of directors or senior loan committee, “substandard” or
  “doubtful,” subject to certain exceptions;
- Analyze, plan for and
  continue to reduce credit concentrations with respect to commercial real
  estate loans and acquisition, development and construction loans;
- Within 60 days of the
  Consent Order, develop or revise, adopt and implement a written liquidity and
  funds management policy, including with respect to maintaining a minimum
  Primary Liquidity Ratio (defined as the sum of net cash, short-term and
  marketable assets divided by the sum of net deposits and short-term
  liabilities) of 15 percent and a Net Non-Core Funding Dependency Ratio
  (defined as noncore liabilities, less short term investments divided by long
  term assets) of 25 percent;
- Not pay cash dividends
  without the prior written consent of the FDIC and DFCS; and
- Not solicit, accept,
  renew or roll over brokered deposits unless it has applied for and been
  granted a waiver of this prohibition by the FDIC.

The Bank believes it has achieved material
compliance with all aspects of the Consent Order described above. In addition to
the listed matters, the Bank was also issued certain directives pursuant to
which it was required to complete certain reports and correct certain
deficiencies outlined in the Consent Order. The Bank believes that it has
complied with these aspects of the Consent Order in all material respects as
well.




Certain portions of the Consent
Order require that the Bank comply with quantitative limitations on various
measures. Following the October 2009 private capital raise, the Bank’s leverage
and capital ratios are in excess of the regulatory requirements. With respect to
reductions in the Bank's ratio of "substandard" assets to Tier 1 capital plus
allowance for loan losses, the Bank believes it has reduced this ratio and was
in compliance with the Consent Order at December 31, 2009. The Bank has also
achieved compliance with requirements under the Consent Order as to its Primary
Liquidity Capital Ratio and Net Non-Core Funding Deficiency Ratio as of December
31, 2009. Whether the Bank will maintain compliance throughout the applicable
compliance periods will depend on several factors beyond the Bank's control. For
more information regarding risks facing Bancorp and the Bank, see the discussion
under the section “Risk Factors” in Item 1A of this report.




For more information regarding the
Bank and Bancorp’s capital and leverage ratios, see the discussion under the
section “Capital Resources” in Item 7 of this report.




Holding Company Written Agreement. On December 15, 2009,
Bancorp entered into a Written Agreement with the Federal Reserve Bank of San
Francisco (the “Reserve Bank”). The Written Agreement requires that as long as
the Written Agreement is in effect, Bancorp may not:


- Declare or pay any
  dividends without the prior written approval of the Reserve Bank, the Federal
  Reserve Director, and the DFCS;
- Directly or indirectly
  take dividends or any other form of payment representing a reduction in
  capital from the Bank without the prior written approval of the Reserve Bank
  and the DFCS;
- Make any payments of
  interest or principal on subordinated indebtedness or trust preferred
  securities without the prior written approval of the Reserve Bank, the Federal
  Reserve Director, and the DFCS; or
- Directly or indirectly
  incur, increase, or guarantee any debt without the prior written approval of
  the Reserve Bank and the DFCS.



10




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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 credit losses.




We are subject to credit risk, which
is the risk that borrowers will fail to repay loans in accordance with their
terms. We maintain an allowance for credit losses that represents management’s
best estimate, as of a particular date, of the probable amount of loan
receivables and unfunded commitments that the Bank will be unable to collect. 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. 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 and reducing future interest
income, and, in certain circumstances, requiring reversal of previously accrued
interest income. If we determine that it is appropriate to increase the
allowance for credit losses to address changing conditions, we will do so
through additional provision for credit losses. Any additional provision for
credit losses to increase the allowance for credit 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 regarding the Company’s allowance for credit losses, see the
discussion under the subheading “Allowance for Credit Losses” and “Critical
Accounting Policies” included in Item 7 of this report.




We continue to hold and acquire a significant
amount of other real estate owned (“OREO”) properties, which has led to
increased operating expenses and vulnerability to additional declines in real
property values.




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 2009, we continued to acquire a significant amount of OREO. At December
31, 2009, the Bank had 672 OREO properties with an aggregate book value of $53.6
million. Large OREO balances have led to significantly increased expenses as we
have incurred costs to manage and dispose of these properties and, in certain
cases, complete construction of structures prior to sale. We expect that our
earnings in 2010 will continue to be negatively affected by various expenses
associated with OREO, including personnel costs, insurance and taxes, completion
and repair costs, valuation adjustments, and other expenses associated with
property ownership, as well as by the funding costs associated with assets that
are tied up in OREO. Any further decrease in market prices of real estate in our
market areas may lead to additional 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. The expenses associated with OREO and any further
property write downs could have a material adverse effect on our financial
condition and results of operations. We currently have $99.3 million in
nonaccrual loans, which may lead to further increase in our OREO balance in the
future.




Impairment of investment securities or
deferred tax assets could negatively impact our results of operations.




Our assessment of the impairment of
investment securities factors in several uncertain and qualitative factors,
including, without limitation, the length of time and extent to which the fair
value of a particular security has been less than cost, the financial condition
and near-term prospects of the issuer, and our intent and ability to retain a
particular investment long enough to recover value in the future. Assessment of
impairment of intangible assets could result in charges to earnings in the
period during which impairment is identified. Our assessment of our ability to
realize deferred tax assets factors in several uncertain and qualitative
factors, including, without limitation, whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized and the
likelihood of generation of future taxable income. The impact of each of these
impairment matters could have a material adverse effect on our business and
results of operations.




We may seek to raise additional capital in the
future to enhance capital levels, improve capital ratios, provide capital for
acquisitions, or increase liquidity available for operations and other
opportunities.




We are not restricted from issuing additional
shares of our Common Stock or Preferred Stock. In the event we desire 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, the issuance of additional common stock, convertible preferred
stock, warrants, or other convertible securities or the exercise of such
securities could be substantially dilutive to holders of our Common Stock and
securities issued in such financings may have rights, preferences and privileges
that are senior to those of our current shareholders. Any debt financing may
include covenants that restrict our operations and interest charges that detract
from future earnings. In the event additional capital is unavailable on
acceptable terms through available financing sources, we may instead take steps
to preserve capital, such as reduced lending activity, and we may not be able to
take advantage of opportunities that might otherwise be available to us.




11




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We may not pay any cash dividends on our
Common Stock for the foreseeable future.




Substantially all of our activities
are conducted through the Bank, and Bancorp receives substantially all of its
funds through dividends from the Bank. Pursuant to the Consent Order, the Bank
is prohibited from paying cash dividends without the prior consent of the FDIC
and the DFCS. Pursuant to the Written Agreement with the Federal Reserve,
Bancorp is prohibited from paying dividends without the prior consent of the
Federal Reserve, the Federal Reserve Director, and the DFCS. We do not know when
the Bank will receive regulatory approval to pay dividends to Bancorp in the
future or when we will receive regulatory approval to accept any such dividends.
If we obtain regulatory approval to pay dividends, we may not pay any cash
dividends on our Common Stock until we are current on interest payments on our
outstanding junior subordinated debentures associated with our pooled trust
preferred securities.




The sale or perceived threat of sale of the
89.5 million shares of Common Stock that we recently registered for re-sale by
investors in our October 2009 private capital raise may have an adverse effect
on the market price of our Common Stock.




The market value of our Common Stock may be
adversely affected by sales of a large number of shares of Common Stock in the
market or the perception that such sales could occur. Of the 89.5 million shares
of Common Stock that were originally registered for resale by investors in the
October 2009 private capital raise, 71.4 million shares are issued and
outstanding, and 18.1 million shares are issuable upon conversion of Preferred
Stock that is presently outstanding or issuable upon exercise of certain
Warrants issued in the private placement transactions. For more information
regarding Bancorp’s private capital raise, see the discussion under the
subheading “Private Capital Raise” in the “Overview” section included in Item 7
of this report.




Our Common Stock is equity and is subordinate
to our indebtedness and Preferred Stock.




Shares of our Common Stock are
equity interests in the Company and do not constitute indebtedness. Shares of
our Common Stock will rank junior to all indebtedness, including junior
subordinated debentures issued in connection with our trust preferred
securities, and other non-equity claims on the Company with respect to assets
available to satisfy claims on the Company, including in a liquidation of the
Company. In the event of a liquidation, holders of our Common Stock are subject
to the prior liquidation rights of any holders of our Preferred Stock then
outstanding. For more information regarding the securities that remain
outstanding following Bancorp’s private capital raise, see the discussion under
the subheading “Private Capital Raise” in the section “Overview” included in
Item 7 of this report.




Rapidly changing interest rates 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 a key driver of our net
interest margin and are subject to many factors beyond our control. As interest
rates change, net interest income is affected. It could also lead to decreased
demand for loans and other products that are priced based on interest rates.
Rapid increases in interest rates 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,
adversely affect our net interest spread and net interest income because our
earning assets yield decreases and stays low during a time that our cost of
interest bearing liabilities is already low and cannot be correspondingly
reduced further. For more
information regarding interest rates, see the discussion under the section
“Quantitative and Qualitative Disclosures about Market Risk” in the Item 7A of
this report.




We face liquidity risks in the operation of
our business.




Liquidity is crucial to the operation of
Bancorp and the Bank. Liquidity risk is the potential that 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. Bancorp is dependent upon cash dividends from the
Bank for most of its liquidity, and the Bank is currently unable to pay
dividends without regulatory consent. Funding illiquidity may arise at the Bank
if we are unable to attract core deposits or renew at acceptable pricing long or
short-term borrowings from the overnight inter-bank market, the Federal Home
Loan Bank (the “FHLB”), or the Federal Reserve discount window. Changes or
disruptions to the FHLB System could adversely impact our ability to meet our
short-term and long-term liquidity requirements. 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. The expiration of the TAG program in June 30, 2010, may
lead to lower deposit volume from withdrawal of demand deposits in excess of
$250,000, especially if we are unable to obtain regulatory approval to
participate in the Certificate of Deposit Account Registry Service (“CDARS”)
network, which increases insured deposit balances by allocating deposits among
participating institutions. For more information regarding the CDARS program,
see the discussion under the heading “Deposits and Borrowings” and “Liquidity
and Sources of Funds” in Item 7 of this report. We are currently prohibited from
accepting new CDARS deposits, which are classified by regulators as brokered
deposits, without prior regulatory approval under the terms of the Consent
Order. If we fail to monitor and control our liquidity risks, there may be
materially adverse effects on our results of operations and financial condition.




12




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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, including the operation of the
deposit insurance fund. 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, increase
based on the costs being borne by the FDIC’s bank insurance fund. The Bank’s
insurance and special assessment costs can be expected to increase in the event
of additional bank failures or other adverse events affecting the banking system
generally or the Bank in particular.




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, 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 the discussion under the heading “Competition” included in Item
1 of this report. If we are unable to compete effectively, we will lose market
share, and income from loans and other products may be reduced. We are currently
in a particularly competitive market for low cost deposits, partly driven by
certain competitors being required to boost their deposit funding balances,
which has led to increased pressure on our deposit balances and net interest
margin.




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 pursuing 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 banking industry, lending markets and secondary markets
for loans and related congressional and regulatory responses may impact how the
Bank conducts business, earns fee income, makes and underwrites loans, and buys
and sells loans in secondary markets. We are unable to predict whether any
legislative or regulatory initiatives or actions will be implemented or what
form they will take. Any such actions could affect us in substantial and
unpredictable ways and could have an adverse effect on our business, financial
condition and results of operations. For more information regarding regulatory
enforcement actions involving Bancorp and the Bank and the regulatory
environment in which we operate, see the discussion under the subheading
“Current Enforcement Actions” and generally under the section “Supervision and
Regulation” included in Item 1 of this report.




Significant legal and regulatory actions could
subject us to uninsured liabilities, associated reputational risk, and reduced
revenues.




From time to time, we are sued for damages or
threatened with lawsuits relating to various aspects of our operations. We may
also be subject to investigations and possibly substantial civil money penalties
assessed by, or other actions of, federal or state regulators in connection with
violations or alleged violations of applicable laws, regulations or standards.
We may incur substantial attorney fees and expenses in the process of defending
against lawsuits or regulatory actions and our insurance policies may not cover,
or cover 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 are
presently subject to regulatory agreements with the primary regulators for
Bancorp and the Bank. These agreements restrict our activities. They also may
negatively affect our reputation.




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.




13




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Market and other constraints on our loan
origination volumes may lead to continued pressure on our interest and fee
income.




Due to the poor economic conditions in the
markets in which we operate and other factors, we expect continued pressure on
new loan originations in the near term, particularly with respect to
construction loans. If we are unable to increase loan volumes, there will be
continued pressure on our interest income and fees generated from our lending
operations. Unless we are able to offset the lower interest income and fees with
increased activity in other areas of our operations, our total revenues may
decline relative to our total noninterest expenses. We expect that it may be
difficult to find new revenue sources in the near term.




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.




The recession negatively impacts 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.




Decreased loan sales 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. The
Consent Order also affects our preferred status as an SBA lender and may result
in a suspension of our ability to originate and sell mortgage loans to our
correspondent lenders. These limitations consequently reduce our ability to
originate and sell SBA and mortgage loans for a gain resulting in lower income
from gains on sales of loans. A decrease in the volume of loans sold may reduce
associated revenues and net income. In addition, in the event of one or more
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 reductions in revenues
associated with loan sales or repurchases of loans previously sold may adversely
affect the results of our lending operations.




Our products and services are delivered on a
technological platform that is subject to rapid change and transformation.




The financial services industry is
undergoing rapid technological change and we face constant evolution of customer
demand for technology-driven financial and banking products and services. Many
of our competitors have substantially greater resources to invest in
technological improvement and product development, marketing, and
implementation. Any failure to successfully keep pace with and fund
technological innovation in the markets in which we compete could have a
material adverse impact on our business and results of operation.




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.




We rely on the Federal Home Loan Bank of
Seattle (the “Seattle FHLB”) as a source of liquidity, and it may be
experiencing liquidity problems of its own.




The Company is highly dependent on the Seattle
FHLB as a source of liquidity and to meet its borrowing needs. Changes or
disruptions to the Seattle FHLB or the FHLB system in general, may materially
impair the Company’s ability to meet its liquidity requirements, including short
and long term borrowing needs. Recently, the Seattle FHLB announced that it met
all minimum regulatory capital requirements as of September 30, 2009. However,
the Federal Housing Finance Agency exercised its discretionary authority to
reaffirm Seattle FHLB’s “undercapitalized” classification. As a result, the
Seattle FHLB cannot pay dividends on its common stock and cannot repurchase or
redeem common stock. Based on the foregoing, there can be no assurance the FHLB
will have sufficient resources to continue to fund our borrowings at their
current levels or the amounts available to us, which could have an adverse
effect on the Bank's liquidity. It is also possible that the Seattle FHLB will
require its members, including the Company, to contribute additional capital to
the Seattle FHLB.




At December 31, 2009, we had stock in the
Seattle FHLB totaling $12.1 million. As of December 31, 2009, we did not
recognize an impairment charge related to our stock holdings in the Seattle FHLB
despite its reported financial difficulties. There can be no assurance, however,
that future negative changes to the financial condition of the Seattle FHLB may
not require us to recognize an impairment charge with respect to these
holdings.




14




---



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 buildings. In
addition, the Bank leases 44 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 51
leased properties is approximately $347,000.




ITEM 3. LEGAL PROCEEDINGS




On June 24, 2009, West Coast Trust was served
with an Objection to Personal Representative's Petition and Petition for
Surcharge of Personal Representative in Linn County Circuit Court. The petition
was filed by the beneficiaries of the estate of Archie Q. Adams, for which West
Coast Trust acts as the personal representative. The petitioners allege a breach
of fiduciary duty with respect to West Coast Trust's prior sale of real property
owned by the Adams estate and sought relief in the form of a surcharge to West
Coast Trust of $215,573,115.60, the amount of the alleged loss to the estate.
The Company filed a motion to dismiss on July 2, 2009, which was granted in a
letter ruling dated September 15, 2009. The Company is uncertain whether the
dismissal of the petition will be appealed. The Company continues to believe the
petition is without merit.




Bancorp and its subsidiaries are 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. RESERVED




15




---



PART II




ITEM
    5.
            
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS ANDISSUER 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, 2009, there were approximately 1,900 holders of
record of our Common Stock.




2009
            
            2008Market
      Price
            
            Cash dividend
            
            Market
      Price
            
            Cash dividendHigh
            
            Low
            
            declared
            
            High
            
            Low
            
            declared1st Quarter
            $
            6.59
            
            $
            1.09
            
            $
            0.01
            
            $
            18.01
            
            $
            11.06
            
            $
            0.142nd Quarter
            $
            4.56
            
            $
            1.85
            
            $
            0.01
            
            $
            15.00
            
            $
            8.67
            
            $
            0.143rd Quarter
            $
            3.33
            
            $
            1.53
            
            $
            0.00
            
            $
            18.12
            
            $
            7.40
            
            $
            0.014th Quarter
            $
            2.82
            
            $
            2.00
            
            $
            0.00
            
            $
            14.76
            
            $
            3.69
            
            $
            0.01


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 the discussion under the section
“Supervision and Regulation” included in Item 1 of this report and the section
“Liquidity and Sources of Funds” included in Item 7 of this report.




Under Bancorp’s written agreement with the
Federal Reserve, Bancorp may not pay cash dividends without prior regulatory
approval. Similarly, the Bank may not pay dividends to Bancorp without consent
of its regulators. Bancorp has also exercised its right to defer regularly
scheduled interest payments on its outstanding junior subordinated debentures
related to its pooled trust preferred securities. It may not pay any cash
dividends on its Common Stock until it is current on interest payments on its
outstanding junior subordinated debentures.




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,
2009:




Total Number of SharesPurchased as Part of Publicly
            
            Maximum Number of Shares
    RemainingTotal Number of Shares
            
            Average Price Paid
            
            Announced Plans or Programs
            
            at Period End that May Be
      PurchasedPeriod
            Purchased/Cancelled (1)
            
            per
      Share
            
            (2)
            
            Under the Plans or
      Programs10/1/09 - 10/31/09
            114
            
            
            $
            2.53
            
            -
            
            1,051,82111/1/09 - 11/30/09
            -
            
            
            $
            0.00
            
            -
            
            1,051,82112/1/09 - 12/31/09
            -
            
            
            $
            0.00
            
            -
            
            1,051,821Total for quarter
            (114
            )
            
            
            
            
            -


(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 114 shares, 0
      shares, and 0 shares, respectively, for the periods indicated. There were
      no shares repurchased in the periods indicated pursuant to the Company’s
      corporate stock repurchase program publicly announced in July 2000 (the
      “Repurchase Program”) and described in footnote 2
below.(2)
            Under the
      Repurchase Program, the board of directors originally authorized the
      Company to purchase up to 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, 2009, of
      approximately 4.9 million shares.






16




---



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, 2009, 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,
2004, 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 -90.6% over the five
year period ended December 31, 2009, compared to -41% and 8.8% for the NASDAQ
Bank Stocks and NASDAQ composite, respectively.









Period EndedIndex
            12/31/04
            12/31/05
            12/31/06
            12/31/07
            12/31/08
            12/31/09West Coast Bancorp
            100.0
            105.6
            140.0
            76.8
            29.1
            9.4NASDAQ
      Composite
            100.0
            102.1
            112.6
            124.6
            75.0
            108.8NASDAQ
      Bank Index
            100.0
            98.0
            111.4
            89.5
            70.6
            59.0


17




---



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
      31,2009
            
            2008
            
            2007
            
            2006
            
            2005Interest income
            
            $
            112,150
            
            
            $
            140,846
            
            
            $
            183,190
            
            
            $
            150,798
            
            
            $
            112,991Interest expense
            
            
            33,423
            
            
            
            48,696
            
            
            
            68,470
            
            
            
            49,926
            
            
            
            26,430Net interest income
            
            
            78,727
            
            
            
            92,150
            
            
            
            114,720
            
            
            
            100,872
            
            
            
            86,561Provision for credit losses
            
            
            90,057
            
            
            
            40,367
            
            
            
            38,956
            
            
            
            2,733
            
            
            
            2,175Net interest income after provision for
      credit losses
            
            
            (11,330
            )
            
            
            51,783
            
            
            
            75,764
            
            
            
            98,139
            
            
            
            84,386Noninterest income
            
            
            9,129
            
            
            
            24,629
            
            
            
            33,498
            
            
            
            28,096
            
            
            
            23,099Noninterest expense
            
            
            108,288
            
            
            
            90,323
            
            
            
            85,299
            
            
            
            81,665
            
            
            
            72,634Income (loss) before income taxes
            
            
            (110,489
            )
            
            
            (13,911
            )
            
            
            23,963
            
            
            
            44,570
            
            
            
            34,851Provision (benefit) for income
      taxes
            
            
            (19,276
            )
            
            
            (7,598
            )
            
            
            7,121
            
            
            
            15,310
            
            
            
            11,011Net income (loss)
            
            $
            (91,213
            )
            
            $
            (6,313
            )
            
            $
            16,842
            
            
            $
            29,260
            
            
            $
            23,840Net interest income on a tax equivalent
      basis2
            
            $
            80,222
            
            
            $
            93,901
            
            
            $
            116,361
            
            
            $
            102,432
            
            
            $
            88,025Per share data:Basic earnings (loss) per
      share
            
            $
            (5.83
            )
            
            $
            (0.41
            )
            
            $
            1.08
            
            
            $
            1.95
            
            
            $
            1.63Diluted earnings (loss) per share
            
            $
            (5.83
            )
            
            $
            (0.41
            )
            
            $
            1.04
            
            
            $
            1.86
            
            
            $
            1.55Cash dividends
            
            $
            0.02
            
            
            $
            0.29
            
            
            $
            0.51
            
            
            $
            0.45
            
            
            $
            0.40Period end book value per common share
            
            $
            7.02
            
            
            $
            12.63
            
            
            $
            13.35
            
            
            $
            12.89
            
            
            $
            10.69Weighted average common shares
      outstanding
            
            
            15,510
            
            
            
            15,472
            
            
            
            15,507
            
            
            
            15,038
            
            
            
            14,658Weighted average diluted shares outstanding
            
            
            15,510
            
            
            
            15,472
            
            
            
            16,045
            
            
            
            15,730
            
            
            
            15,344Total assets
            
            $
            2,733,547
            
            
            $
            2,516,140
            
            
            $
            2,646,614
            
            
            $
            2,465,372
            
            
            $
            1,997,138Total deposits
            
            $
            2,146,884
            
            
            $
            2,024,379
            
            
            $
            2,094,832
            
            
            $
            2,006,352
            
            
            $
            1,649,462Total long-term borrowings
            
            $
            250,699
            
            
            $
            91,059
            
            
            $
            83,100
            
            
            $
            57,991
            
            
            $
            83,100Total loans, net
            
            $
            1,686,352
            
            
            $
            2,035,876
            
            
            $
            2,125,752
            
            
            $
            1,924,673
            
            
            $
            1,533,985Stockholders’ equity
            
            $
            249,058
            
            
            $
            198,187
            
            
            $
            208,241
            
            
            $
            200,882
            
            
            $
            157,123Financial ratios:Return on average assets
            
            
            -3.49
            %
            
            
            -0.25
            %
            
            
            0.66
            %
            
            
            1.33
            %
            
            
            1.28
            %Return on average
    equity
            
            
            -45.66
            %
            
            
            -3.06
            %
            
            
            7.93
            %
            
            
            16.47
            %
            
            
            15.76
            %Average equity to average assets
            
            
            7.64
            %
            
            
            8.04
            %
            
            
            8.37
            %
            
            
            8.10
            %
            
            
            8.09
            %Dividend payout
ratio
            
            
            -0.34
            %
            
            
            -70.73
            %
            
            
            47.51
            %
            
            
            24.19
            %
            
            
            24.50
            %Efficiency ratio1
            
            
            122.34
            %
            
            
            72.79
            %
            
            
            56.90
            %
            
            
            62.23
            %
            
            
            64.19
            %Net loans to assets
            
            
            61.69
            %
            
            
            80.91
            %
            
            
            80.33
            %
            
            
            78.07
            %
            
            
            76.81
            %Average yields earned2
            
            
            4.71
            %
            
            
            5.92
            %
            
            
            7.72
            %
            
            
            7.37
            %
            
            
            6.49
            %Average rates paid
            
            
            1.76
            %
            
            
            2.60
            %
            
            
            3.76
            %
            
            
            3.27
            %
            
            
            2.06
            %Net
      interest spread2
            
            
            2.95
            %
            
            
            3.32
            %
            
            
            3.96
            %
            
            
            4.10
            %
            
            
            4.43
            %Net interest margin2
            
            
            3.33
            %
            
            
            3.90
            %
            
            
            4.86
            %
            
            
            4.96
            %
            
            
            4.99
            %Nonperforming assets to total assets
            
            
            5.59
            %
            
            
            7.86
            %
            
            
            1.12
            %
            
            
            0.06
            %
            
            
            0.05
            %Allowance for loan losses to
      total loans
            
            
            2.23
            %
            
            
            1.40
            %
            
            
            2.16
            %
            
            
            1.18
            %
            
            
            1.32
            %Allowance for credit losses to total loans
            
            
            2.29
            %
            
            
            1.45
            %
            
            
            2.53
            %
            
            
            1.18
            %
            
            
            1.32
            %Net loan charge-offs to
      average loans
            
            
            4.21
            %
            
            
            3.04
            %
            
            
            0.34
            %
            
            
            0.06
            %
            
            
            0.05
            %Allowance for loan loss tononperforming loans
            
            
            38.74
            %
            
            
            22.67
            %
            
            
            177.53
            %
            
            
            1567.61
            %
            
            
            1881.86
            %


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.


18




---



Consolidated Quarterly Financial Data




The following table presents selected
consolidated quarterly financial data for each quarter of 2008 and 2009. 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.




2009(Dollars in thousands, except per share data)
            
            December
      31,
            
            September
      30,
            
            June
      30,
            
            March
      31,Interest income
            
            $
            26,948
            
            
            $
            27,725
            
            
            $
            28,869
            
            
            $
            28,608Interest expense
            
            
            7,710
            
            
            
            8,580
            
            
            
            8,655
            
            
            
            8,478Net
      interest income
            
            
            19,238
            
            
            
            19,145
            
            
            
            20,214
            
            
            
            20,130Provision for credit losses
            
            
            35,233
            
            
            
            20,300
            
            
            
            11,393
            
            
            
            23,131Noninterest income (loss)
            
            
            (6,148
            )
            
            
            4,971
            
            
            
            5,958
            
            
            
            4,348Noninterest expense
            
            
            24,181
            
            
            
            23,489
            
            
            
            25,244
            
            
            
            35,374Loss before income taxes
            
            
            (46,324
            )
            
            
            (19,673
            )
            
            
            (10,465
            )
            
            
            (34,027
            )Provision (benefit) for income taxes
            
            
            2,543
            
            
            
            (7,265
            )
            
            
            (4,126
            )
            
            
            (10,428
            )Net
      loss
            
            $
            (48,867
            )
            
            $
            (12,408
            )
            
            $
            (6,339
            )
            
            $
            (23,599
            )Loss per common share:Basic
            
            $
            (3.13
            )
            
            $
            (0.79
            )
            
            $
            (0.41
            )
            
            $
            (1.51
            )Diluted
            
            $
            (3.13
            )
            
            $
            (0.79
            )
            
            $
            (0.41
            )
            
            $
            (1.51
            )Return on average assets1
            
            
            -7.06
            %
            
            
            -1.85
            %
            
            
            -0.99
            %
            
            
            -3.85
            %Return on average equity1
            
            
            -74.54
            %
            
            
            -29.39
            %
            
            
            -14.61
            %
            
            
            -48.54
            %


1
            Ratios have
      been annualized.


2008(Dollars in thousands, except per share data)
            
            December
      31,
            
            September
      30,
            
            June
      30,
            
            March
      31,Interest income
            
            $
            32,017
            
            
            $
            34,772
            
            
            $
            35,745
            
            
            $
            38,312Interest expense
            
            
            10,880
            
            
            
            11,049
            
            
            
            12,032
            
            
            
            14,735Net
      interest income
            
            
            21,137
            
            
            
            23,723
            
            
            
            23,713
            
            
            
            23,577Provision for credit losses
            
            
            16,517
            
            
            
            9,125
            
            
            
            6,000
            
            
            
            8,725Noninterest income
            
            
            4,310
            
            
            
            1,070
            
            
            
            9,038
            
            
            
            10,211Noninterest expense
            
            
            22,535
            
            
            
            22,221
            
            
            
            23,346
            
            
            
            22,221Income (loss) before income taxes
            
            
            (13,605
            )
            
            
            (6,553
            )
            
            
            3,405
            
            
            
            2,842Provision (benefit) for income taxes
            
            
            (4,924
            )
            
            
            (4,237
            )
            
            
            721
            
            
            
            842Net
      income (loss)
            
            $
            (8,681
            )
            
            $
            (2,316
            )
            
            $
            2,684
            
            
            $
            2,000Earnings (loss) per common
    share:Basic
            
            $
            (0.56
            )
            
            $
            (0.15
            )
            
            $
            0.17
            
            
            $
            0.13Diluted
            
            $
            (0.56
            )
            
            $
            (0.15
            )
            
            $
            0.17
            
            
            $
            0.13Return on average assets1
            
            
            -1.38
            %
            
            
            -0.36
            %
            
            
            0.41
            %
            
            
            0.31
            %Return on average equity1
            
            
            -17.21
            %
            
            
            -4.47
            %
            
            
            5.19
            %
            
            
            3.81
            %


1
            Ratios have
      been annualized.


19




---



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, 2009 and 2008, and for each of the three
years in the period ended December 31, 2009, 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. Words such as
“could,” “may,” “should,” “plan,” “believes,” “anticipates,” “estimates,”
“predicts,” “expects,” “projects,” “potential,” or “continue,” or words of
similar import, often help identify “forward-looking statements,” which include
any statements that expressly or implicitly predict future events, results, or
performance. Factors that could cause events, results or performance to differ
from those expressed or implied by our forward-looking statements include, among
others, risks discussed in Item 1A, “Risk Factors” of this report, risks
discussed elsewhere in the text of this report, as well as the following
specific factors:


- General economic conditions,
  whether national or regional, and conditions in real estate markets, that may
  affect the demand for our loan and other products, lead to further declines in
  credit quality and additional loan losses, and negatively affect the value and
  salability of the real estate that we own or is the collateral for many of our
  loans and hinder our ability to increase lending activities;
- Changing bank regulatory
  conditions, policies, or programs, whether arising as new legislation or
  regulatory initiatives or changes in our regulatory classifications, that
  could lead to restrictions on activities of banks generally or West Coast Bank
  (the “Bank”) in particular, increased costs, including deposit insurance
  premiums, the elimination or expiration of programs expanding deposit
  insurance coverage, regulation or prohibition of certain income producing
  activities, or changes in the secondary market for bank loan and other
  products;
- Competitive factors, including
  competition with community, regional and national financial institutions, that
  may lead to pricing pressures that reduce yields earned on loans and increase
  rates paid on deposits, the loss of our most valued customers, defection of
  key employees or groups of employees, or other losses;
- Increasing or decreasing interest
  rate environments, including the slope and level of the yield curve, that
  could lead to decreases in net interest margin, lower net interest and fee
  income, including lower gains on sales of loans, and changes in the value of
  Bancorp’s investment securities; and
- Changes or failures in technology
  or third party vendor relationships in important revenue production or service
  areas or increases in required investments in technology that could reduce our
  revenues, increase our costs, or lead to disruptions in our business.

Furthermore, forward-looking statements are
subject to risks and uncertainties related to the Company’s ability to, among
other things: dispose of properties or other assets obtained through
foreclosures at expected prices and within a reasonable period of time; attract
and retain key personnel; generate loan and deposit balances at projected
spreads; sustain fee generation including gains on sales of loans; maintain
asset quality and control risk; limit the amount of net loan charge-offs; adapt
to changing customer deposit, investment and borrowing behaviors; control
expense growth; and monitor and manage the Company’s financial reporting,
operating and disclosure control environments.




Readers are cautioned not to place undue
reliance on our forward-looking statements, which reflect management’s analysis
only as of the date of the statements. 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”).




20




---



Overview




2009 Financial review. 2009 was a challenging
year for the Company. Continued weakness in the national and local economies,
combined with the particular effects of losses in portions of our loan
portfolio, significantly impacted the Company’s results in 2009. During 2009, we
incurred:


- A full year net loss of $91.2
  million compared to a loss of $6.3 million in 2008;
- A decrease in the net interest
  margin to 3.33% from 3.90% in 2008;
- A full year provision for credit
  losses of $90.1 million, up $49.7 million from $40.4 million in 2008;
- Net loan charge-offs of $80.6
  million compared to $65.3 million in 2008;
- OREO valuation adjustments and
  losses on sale of $27.0 million compared to $5.4 million in 2008;
- A goodwill impairment charge of
  $13.1 million; and
- A $21.0 million additional tax
  expense related to the establishment of a deferred tax asset valuation
  allowance.

Despite the challenges faced by the Company,
management proactively implemented and executed certain strategies that resulted
in key accomplishments during 2009:


- The Company successfully raised
  $155.0 million in private capital on October 26, 2009;
- The Bank’s total and tier 1
  risk-based capital ratios increased from 10.91% and 9.66% at December 31, 2008
  to 15.37% and 14.11%, respectively, at December 31, 2009, primarily as a
  result of the private capital raise (as described below);
- The Company’s liquidity position
  also improved significantly as evidenced by a $363.8 million increase in the
  investment securities portfolio;
- Real estate construction loan
  balances decreased $185.8 million or 65% from year end 2008;
- Total nonperforming assets
  declined $44.8 million to $152.9 million at December 31, 2009;
- Fourth quarter 2009 average total
  deposits increased $120.7 million or 6% from the final quarter of 2008, and
  the average rate paid on total deposits declined to .99% from 1.68%;
  and
- The Company increased the number
  of demand deposit accounts by 6% or nearly 6,000 accounts.

Private Capital Raise. In October 2009, the Company completed the private sale of an aggregate
of $155.0 million of newly issued Preferred Stock and Warrants of the Company
(such transactions, the “private capital raise”), including:


- 1,428,849 shares of Mandatorily
  Convertible Cumulative Participating Preferred Stock, Series A, no par value
  (“Series A Preferred Stock”);
- 121,328 shares of Mandatorily
  Convertible Cumulative Participating Preferred Stock, Series B, no par value
  (“Series B Preferred Stock”);and
- Class C Warrants to purchase an
  aggregate of 240,000 shares of Series B Preferred Stock at an exercise price
  of $100.00 per share.

The net proceeds to the Company from
the private capital raise were $139.2 million, of which $5.0 million was
retained by Bancorp and $134.2 million was contributed to the Bank as a capital
contribution.




All securities issued in the private capital
raise were issued and outstanding at December 31, 2009, including certain
warrants not referenced above that terminated unexercised upon receipt of the
shareholder approvals described below.




In connection with the private capital raise
and subject to receipt of required regulatory approvals, certain investors in
the transactions were provided a right to maintain a representative on the
Company’s Board of Directors for so long as such investors beneficially own at
least 5% of the Company’s outstanding shares of Common Stock on an as-converted
basis. Certain investors are entitled to have an observer attend meetings of the
Board.




21




---



Regulatory Enforcement Actions. Bancorp and the Bank are parties to a
regulatory agreement and consent order. For more information, see the discussion
under the subheading “Current Enforcement Actions” in the section “Supervision
and Regulation” included in Item 1 of this report. Bancorp’s agreement with the
Federal Reserve is referred to in this Item 7 as the “Written Agreement”, while
the Bank’s agreement and order with the Federal Deposit Insurance Corporation
(“FDIC”) and Oregon Department of Consumer and Business Services Division of
Finance and Corporate Securities (the “DFCS”) is referred to as the “Consent
Order”.




Recent Developments. On January 20, 2010, the Company’s shareholders approved an increase in
authorized Common Stock from 50.0 million shares to 250.0 million shares and the
conversion of Preferred Stock issued in the private capital raise into Common
Stock.




As a result of the shareholder approvals, the
1,428,849 shares of Series A Preferred Stock issued in the private capital raise
converted into 71.4 million shares of Common Stock on January 27, 2010.
Additionally, the 121,328 shares of Series B Preferred Stock issued in the
transactions (as well as 240,000 additional shares of Series B Preferred Stock
issuable upon exercise of outstanding Class C Warrants) become mandatorily
convertible into shares of Common Stock after the shares of Series B Preferred
Stock have been transferred to third parties not affiliated with certain
original investors in a widely dispersed offering.




Following conversion of the Series A
Preferred Stock into Common Stock, the Company had outstanding:


- 87.1 million shares of Common
  Stock;
- 121,328 shares of Series B
  Preferred Stock (convertible into 6.1 million shares of Common Stock);
  and
- The Class C Warrants to purchase
  at a price of $100 per share an aggregate of 240,000 shares of Series B
  Preferred Stock (convertible into 12.0 million shares of Common Stock).

For regulatory reasons, no conversion of
Series B Preferred Stock can occur until the condition of a widely disbursed
offering of the preferred shares has been satisfied.




On January 29, 2010, Bancorp announced the
commencement of a $10.0 million rights offering of up to 5.0 million shares of
Common Stock. Pursuant to the terms of the rights offering, the Company
distributed to its common shareholders of record on January 19, 2010,
non-transferable rights to subscribe for and purchase up to an aggregate of 5.0
million shares of its Common Stock (or 0.31787 subscription rights for each
share of Common Stock owned) at a subscription price of $2.00 per share. The
rights offering also included an over-subscription privilege pursuant to which
each rights holder that exercised the basic subscription privilege in full was
entitled to purchase additional shares of Common Stock that remained
unsubscribed at the expiration of the rights offering, subject to a pro rata
allocation of shares among persons exercising this over-subscription right if
necessary.




The rights offering expired on March 1, 2010,
and was oversubscribed. As a result, Bancorp expects to issue 5.0 million shares
of Common Stock in the rights offering and receive gross proceeds of $10.0
million. Over subscription requests were fulfilled on a pro rata basis. The
excess subscription payments received by the subscription agent will be returned
without interest.




22




---



Income Statement Overview




Our net loss for the full year 2009 was $91.2
million, compared to a loss of $6.3 million in 2008, and income of $16.8 million
in 2007. The loss per diluted share for the years ended December 31, 2009 and
2008 were $5.83 and $.41, respectively, while earnings per diluted share for
2007 was $1.04. Return on average equity declined to -45.7% in 2009 from -3.1%
in 2008 and 7.9% in 2007. The provision for credit losses for the year ended
December 31, 2009 was $90.1 million, an increase from $40.4 million in 2008 and
$38.9 million in 2007.




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
      Change2009
            
            2008
            
            2007
            
            09-08
            
            08-07
            
            09-08
            
            08-07Interest and fee income1
            
            $
            113,645
            
            
            $
            142,597
            
            
            $
            184,831
            
            
            $
            (28,952
            )
            
            $
            (42,234
            )
            
            -20.3
            %
            
            -22.9
            %Interest expense
            
            $
            33,423
            
            
            $
            48,696
            
            
            $
            68,470
            
            
            $
            (15,273
            )
            
            $
            (19,774
            )
            
            -31.4
            %
            
            -28.9
            %Net interest income1
            
            $
            80,222
            
            
            $
            93,901
            
            
            $
            116,361
            
            
            $
            (13,679
            )
            
            $
            (22,460
            )
            
            -14.6
            %
            
            -19.3
            %Average interest earning
assets
            
            $
            2,410,755
            
            
            $
            2,409,896
            
            
            $
            2,394,958
            
            
            $
            859
            
            
            $
            14,938
            
            
            0.0
            %
            
            0.6
            %Average interest bearing liabilities
            
            $
            1,897,170
            
            
            $
            1,876,083
            
            
            $
            1,821,299
            
            
            $
            21,087
            
            
            $
            54,784
            
            
            1.1
            %
            
            3.0
            %Average interest earning
    assets/Average interest bearing liabilities
            
            
            127.07
            %
            
            
            128.45
            %
            
            
            131.50
            %
            
            
            -1.38
            %
            
            
            -3.04
            %Average yield earned1
            
            
            4.71
            %
            
            
            5.92
            %
            
            
            7.72
            %
            
            
            -1.21
            %
            
            
            -1.80
            %Average rate paid
            
            
            1.76
            %
            
            
            2.60
            %
            
            
            3.76
            %
            
            
            -0.84
            %
            
            
            -1.16
            %Net interest spread1
            
            
            2.95
            %
            
            
            3.32
            %
            
            
            3.96
            %
            
            
            -0.37
            %
            
            
            -0.64
            %Net interest margin1
            
            
            3.33
            %
            
            
            3.90
            %
            
            
            4.86
            %
            
            
            -0.57
            %
            
            
            -0.96
            %


1
            Interest earned
      on nontaxable securities has been computed on a 35% tax equivalent
      basis.




Net interest income on a tax equivalent basis
totaled $80.2 million for the year ended December 31, 2009, a decrease of $13.7
million or 14.6% from $93.9 million for 2008, which represented a decrease of
$22.5 million from 2007. The net interest margin declined 57 basis points to
3.33% in 2009 from 3.90% in 2008. The decrease in net interest income and margin
from 2008 to 2009 was mainly due to lower loan yields caused by low market
interest rates which we were unable to fully offset by reducing rates paid on
deposits and borrowings, the considerable shift in earning asset mix from higher
yielding loan balance to lower yielding cash and investment security balances, a
lower benefit from noninterest bearing deposits, and the lengthening of the
Company’s Federal Home Loan Bank (“FHLB”) debt in 2009. The net interest margin
was 4.86% in 2007.




Deposit rates and volumes in 2009
continued to be affected by customers’ concerns over the stability of the
banking system, the failure of several financial institutions and ongoing weak
economic environment. Business customers, in particular, allocated their funds
among multiple banks as well as moved deposits into fully insured transaction
deposit accounts to take advantage of the FDIC's TAG Program. There is risk that
such deposits may decline when the TAG Program expires, which is scheduled to
occur on June 30, 2010.




Changing interest rate environments, including
the slope, level of, and changes in the yield curve, and competitive pricing
pressure, and changing economic conditions, 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, 2009, we estimate that we are slightly asset sensitive, meaning
that earning assets mature or reprice more quickly than interest bearing
liabilities in a given time period. For more information regarding interest
rates, see the discussion under the section “Quantitative and Qualitative
Disclosures about Market Risk” in the Item 7A of this report.




Until our loan balances begin to expand and
the value of noninterest bearing deposit balances increase, we project continued
pressure on our net interest margin. Whether we will be able to expand our loan
portfolio in the near future will be primarily dependent on increased economic
activity and improved market conditions, which affect both qualified loan demand
and credit quality. However, we believe the private capital raise has
significantly improved our ability to respond to loan opportunities that do
arise.




23




---



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)
            
            2009
            
            2008
            
            2007Average
            
            
            
            
            
            
            Average
            
            Interest
            
            
            
            Average
            
            InterestOutstanding
            
            Interest
            
            Yield/
            
            Outstanding
            
            Earned/
            
            Yield/
            
            Outstanding
            
            Earned/
            
            Yield/Balance
            
            Earned/
      Paid
            
            Rate 1
            
            Balance
            
            Paid
            
            Rate1
            
            Balance
            
            Paid
            
            Rate1ASSETS:Interest earning
      balancesdue from banks
            
            $
            136,944
            
            
            $
            366
            
            0.27
            %
            
            $
            2,333
            
            
            $
            38
            
            1.63
            %
            
            $
            1,217
            
            
            $
            51
            
            4.19
            %Federal funds sold
            
            
            6,673
            
            
            
            6
            
            0.09
            %
            
            
            16,867
            
            
            
            340
            
            2.02
            %
            
            
            10,813
            
            
            
            513
            
            4.74
            %Taxable securities2
            
            
            276,852
            
            
            
            8,646
            
            3.12
            %
            
            
            157,648
            
            
            
            7,700
            
            4.88
            %
            
            
            207,782
            
            
            
            10,398
            
            5.00
            %Nontaxable securities3
            
            
            72,770
            
            
            
            4,270
            
            5.87
            %
            
            
            83,826
            
            
            
            5,002
            
            5.97
            %
            
            
            76,799
            
            
            
            4,689
            
            6.11
            %Loans, including fees4
            
            
            1,917,516
            
            
            
            100,357
            
            5.23
            %
            
            
            2,149,222
            
            
            
            129,517
            
            6.03
            %
            
            
            2,098,347
            
            
            
            169,180
            
            8.06
            %Total interest earning assets
            
            
            2,410,755
            
            
            
            113,645
            
            4.71
            %
            
            
            2,409,896
            
            
            
            142,597
            
            5.92
            %
            
            
            2,394,958
            
            
            
            184,831
            
            7.72
            %Allowance for loan losses
            
            
            (37,363
            )
            
            
            
            
            
            
            
            
            (38,328
            )
            
            
            
            
            
            
            
            
            (26,243
            )Premises and
    equipment
            
            
            31,309
            
            
            
            
            
            
            
            
            
            34,141
            
            
            
            
            
            
            
            
            
            32,598Other assets
            
            
            210,575
            
            
            
            
            
            
            
            
            
            163,910
            
            
            
            
            
            
            
            
            
            136,405Total assets
            
            $
            2,615,276
            
            
            
            
            
            
            
            
            $
            2,569,619
            
            
            
            
            
            
            
            
            $
            2,537,718LIABILITIES ANDSTOCKHOLDERS' EQUITY:Interest bearing
    demand
            
            $
            298,002
            
            
            $
            776
            
            0.26
            %
            
            $
            279,227
            
            
            $
            1,963
            
            0.70
            %
            
            $
            278,734
            
            
            $
            3,436
            
            1.23
            %Savings
            
            
            89,903
            
            
            
            714
            
            0.79
            %
            
            
            71,542
            
            
            
            578
            
            0.81
            %
            
            
            72,787
            
            
            
            569
            
            0.78
            %Money market
            
            
            617,881
            
            
            
            8,194
            
            1.33
            %
            
            
            658,360
            
            
            
            14,633
            
            2.22
            %
            
            
            665,037
            
            
            
            24,953
            
            3.75
            %Time deposits
            
            
            587,299
            
            
            
            14,758
            
            2.51
            %
            
            
            566,195
            
            
            
            20,375
            
            3.60
            %
            
            
            554,263
            
            
            
            26,078
            
            4.70
            %Short-term borrowings5
            
            
            44,220
            
            
            
            806
            
            1.82
            %
            
            
            149,016
            
            
            
            4,312
            
            2.89
            %
            
            
            136,731
            
            
            
            7,057
            
            5.16
            %Long-term borrowings6
            
            
            259,865
            
            
            
            8,175
            
            3.15
            %
            
            
            151,743
            
            
            
            6,835
            
            4.50
            %
            
            
            113,747
            
            
            
            6,377
            
            5.61
            %Total interest bearingliabilities
            
            
            1,897,170
            
            
            
            33,423
            
            1.76
            %
            
            
            1,876,083
            
            
            
            48,696
            
            2.60
            %
            
            
            1,821,299
            
            
            
            68,470
            
            3.76
            %Demand deposits
            
            
            499,283
            
            
            
            
            
            
            
            
            
            470,601
            
            
            
            
            
            
            
            
            
            479,311Other liabilities
            
            
            19,044
            
            
            
            
            
            
            
            
            
            16,409
            
            
            
            
            
            
            
            
            
            24,759Total liabilities
            
            
            2,415,497
            
            
            
            
            
            
            
            
            
            2,363,093
            
            
            
            
            
            
            
            
            
            2,325,369Stockholders' equity
            
            
            199,779
            
            
            
            
            
            
            
            
            
            206,526
            
            
            
            
            
            
            
            
            
            212,349Total liabilities andstockholders' equity
            
            $
            2,615,276
            
            
            
            
            
            
            
            
            $
            2,569,619
            
            
            
            
            
            
            
            
            $
            2,537,718Net interest income
            
            
            
            
            
            $
            80,222
            
            
            
            
            
            
            
            
            $
            93,901
            
            
            
            
            
            
            
            
            $
            116,361Net
      interest spread
            
            
            
            
            
            
            
            
            2.95
            %
            
            
            
            
            
            
            
            
            3.32
            %
            
            
            
            
            
            
            
            
            3.96
            %Net
      interest margin
            
            
            
            
            
            
            
            
            3.33
            %
            
            
            
            
            
            
            
            
            3.90
            %
            
            
            
            
            
            
            
            
            4.86
            %


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, 2009,
      2008 and 2007, was $1.5 million, $1.8 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 $193.0 million and $266.3 million for
      the years ended December 31, 2009 and 2008,
  respectively.6
            Includes
      junior subordinated debentures with average balance of $51 million for
      2009 and 2008.





24




---



Net Interest Income – Changes Due to Rate and Volume. The following table sets forth the dollar
amounts of the changes in consolidated net interest income attributable to
changes in volume and to changes in interest rates. Changes not due solely to
volume or rate and changes due to new product lines, if any, are allocated to
volume.




Year Ended December 31,2009
      compared to 2008
            
            2008
      compared to 2007(Dollars in thousands)
            
            Increase (Decrease) due to:
            
            Total Increase
            
            Increase (Decrease) due to:
            
            Total IncreaseVolume
            
            Yield/Rate
            
            (Decrease)
            
            Volume
            
            Yield/Rate
            
            (Decrease)Interest income:Interest earning balances duefrom banks
            
            $
            2,216
            
            
            $
            (1,888
            )
            
            $
            328
            
            
            $
            47
            
            
            $
            (60
            )
            
            $
            (13
            )Federal funds sold
            
            
            (206
            )
            
            
            (128
            )
            
            
            (334
            )
            
            
            287
            
            
            
            (460
            )
            
            
            (173
            )Investment security income:Interest on taxable
      securities
            
            
            5,781
            
            
            
            (4,835
            )
            
            
            946
            
            
            
            (2,723
            )
            
            
            25
            
            
            
            (2,698
            )Interest on nontaxable securities1
            
            
            (660
            )
            
            
            (73
            )
            
            
            (733
            )
            
            
            429
            
            
            
            (115
            )
            
            
            314Loans, including fees on loans
            
            
            (10,234
            )
            
            
            (18,925
            )
            
            
            (29,159
            )
            
            
            2,396
            
            
            
            (42,059
            )
            
            
            (39,663
            )Total interest income1
            
            
            (3,103
            )
            
            
            (25,849
            )
            
            
            (28,952
            )
            
            
            436
            
            
            
            (42,669
            )
            
            
            (42,233
            )Interest expense:Interest bearing demand
            
            
            132
            
            
            
            (1,319
            )
            
            
            (1,187
            )
            
            
            6
            
            
            
            (1,479
            )
            
            
            (1,473
            )Savings
            
            
            148
            
            
            
            (12
            )
            
            
            136
            
            
            
            (9
            )
            
            
            19
            
            
            
            10Money market
            
            
            (900
            )
            
            
            (5,539
            )
            
            
            (6,439
            )
            
            
            (236
            )
            
            
            (10,085
            )
            
            
            (10,321
            )Time deposits
            
            
            (1,349
            )
            
            
            (4,268
            )
            
            
            (5,617
            )
            
            
            632
            
            
            
            (6,335
            )
            
            
            (5,703
            )Short-term borrowings
            
            
            (3,032
            )
            
            
            (474
            )
            
            
            (3,506
            )
            
            
            634
            
            
            
            (3,379
            )
            
            
            (2,745
            )Long-term borrowings2
            
            
            4,871
            
            
            
            (3,531
            )
            
            
            1,340
            
            
            
            2,130
            
            
            
            (1,672
            )
            
            
            458Total interest
    expense
            
            
            (130
            )
            
            
            (15,143
            )
            
            
            (15,273
            )
            
            
            3,157
            
            
            
            (22,931
            )
            
            
            (19,774
            )Increase
      (decrease) in net interest income1
            
            $
            (2,973
            )
            
            $
            (10,706
            )
            
            $
            (13,679
            )
            
            $
            (2,721
            )
            
            $
            (19,738
            )
            
            $
            (22,459
            )


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,
2009, net interest income on a tax equivalent basis was $80.2 million, a decline
of $13.7 million from $93.9 million in 2008. The decline in net interest income
was mainly attributable to lower loan balances and a 57 basis point decline in
the net interest margin. In 2007, net interest income on a tax equivalent basis
was $116.4 million. The $22.5 million decline from 2007 to 2008 was primarily
driven by lower loan yields and fees along with higher nonaccrual loan balances,
which led to increased interest reversals.




For the year ended December 31, 2009, lower
loan balances, yields, and fees, especially in the real estate construction
category, were the main drivers in the $29.0 million decline in interest income.
Lower deposit rates only partially offset the decline in interest income. The
$42.2 million decline in interest income during 2008 compared to 2007 was due to
similar factors as well as increased interest reversals as a result of more
loans transitioning to nonperforming status in 2008.




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
losses related to unfunded commitments. The provision for credit losses reflects
changes in the credit quality of the entire loan portfolio. The provision for
credit losses is recorded to bring the allowance for loan losses and the reserve
for unfunded commitments to amounts considered appropriate by management based
on factors which are described in the “Credit Management” and “Allowance for
Credit Losses and Net Loan Charge-offs” sections of this report.




The provision for credit losses was
$90.1 million, $40.4 million, and $38.9 million for the years ended December 31,
2009, 2008 and 2007, respectively, while net loan charge-offs were $80.6
million, $65.3 million, and $7.1 million, over those same years.




The provision for credit losses increased
$49.7 million in 2009 over 2008 and reflected the significantly higher net loan
charge-offs recorded and a continued negative loan risk rating migration within
the loan portfolio. As a result, the general valuation allowances within the
allowance for credit losses model were increased during 2009. Over half of the
increase in the provision for credit losses in 2009 can be attributed to the
commercial and non two-step loan segments of the loan portfolio. The provision
for credit losses related to the portfolio of two-step residential construction
loans (the “two-step loan portfolio”) declined to $6.3 million in 2009, from
$9.5 million in 2008.




25




---



The $40.4 million provision for credit losses
in 2008 represented only a modest increase over the $38.9 million provision for
2007. This amount included a provision relating to loans outside the two-step
loan portfolio of $30.9 million, up from $8.0 million in 2007, and a provision
of $9.5 million associated with the two-step loan portfolio. The 2007 provision
of $38.9 million was largely driven by a fourth quarter charge of $30.0 million,
of which $27.8 million related to loans originated in the two-step loan program.
At December 31, 2009, the remaining balance in the two-step loan portfolio was
$2.4 million; therefore, we expect no material provision for credit losses
related to two-step loans in the future.




The level of the Company’s future provisioning
will be heavily dependent on the local real estate market for both residential
and commercial properties, general economic conditions nationally and in the
areas in which we do business, and the effects of any changes in interest
rates.




Noninterest Income .
Noninterest income remains a key focus, particularly revenues generated by our
deposit accounts and payment systems products. Our noninterest income for the
year ended December 31, 2009 was $9.1 million down $15.5 million compared to
$24.6 million in 2008. This decrease predominantly reflected a $21.6 million
increase in losses related to OREO property sales and valuation adjustments,
which is a component of noninterest income. The increase in losses on OREO sales
and valuation adjustments was mainly caused by the continued decline in OREO
property values during 2009. Additionally, in the fourth quarter of 2009, the
Company sold 69 OREO properties with a book value of $18.9 million in a bulk
sale. The Company recorded an OREO loss on sale of $6.7 million associated with
this transaction.




Noninterest income before the effects of OREO
losses was $36.1 million in 2009 compared to $30.0 million in 2008. Noninterest
income in 2008 included a $6.3 million other-than-temporary impairment (“OTTI”)
charge as compared to a $.2 million OTTI charge for 2009. Service charges on
deposit accounts were up $.2 million in 2009, while payment systems related
revenues increased $.4 million in 2009 compared to 2008. These increases mainly
resulted from an increase in the number of deposit transaction accounts and
associated cards. Trust and investment service revenue declined 24% or $1.3
million in 2009 compared to 2008 primarily due to a challenging environment for
investment sales. In 2009, gains on sales of loans were $1.7 million, down 25%
from $2.3 million for 2008. This decrease was due to reduced mortgage loan
originations and sales of residential mortgage loans as well as a decrease in
the gains on sales of Small Business Administration loans in 2009.




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. This decrease predominantly reflected the $6.3 million OTTI
charge recorded in 2008. In 2008, service charges on deposit accounts were up
$2.6 million or over 20% and payment systems related revenues increased $1.0
million or 13% compared to 2007.




Our ability to increase noninterest income in
the future will be dependent on many factors, including our ability to retain
and grow deposit balances and develop new products and on the effects of any new
legislation or regulations limiting bank activities. For instance, it is
anticipated that new regulations regarding deposit service charges for
transaction accounts could have a material impact on the Company’s revenue from
deposit service charges when implemented as of July 1, 2010. Gains on sales of
loans may also be adversely affected by the Consent Order, which may limit our
SBA lending and negatively impact correspondent banking relationships pursuant
to which we place many of our mortgage loans, particularly jumbo loans.
Additional OREO valuation adjustments and competitive factors could also
adversely affect our noninterest income.




The following table illustrates the
components and change in noninterest income for the periods shown:




(Dollars in thousands)
            
            Full year
            
            Full year
            
            2009 to 2008
            
            Full year2009
            
            2008
            
            Change
            
            2007Noninterest incomeService charges on deposit
      accounts
            
            $
            15,765
            
            
            $
            15,547
            
            
            $
            218
            
            
            $
            12,932Payment systems related revenue
            
            
            9,399
            
            
            
            9,033
            
            
            
            366
            
            
            
            8,009Trust and investment services
      revenues
            
            
            4,101
            
            
            
            5,413
            
            
            
            (1,312
            )
            
            
            6,390Gains on sales of loans
            
            
            1,738
            
            
            
            2,328
            
            
            
            (590
            )
            
            
            3,364Other
            
            
            4,438
            
            
            
            3,252
            
            
            
            1,186
            
            
            
            2,843Other-than-temporary impairment losses
            
            
            (192
            )
            
            
            (6,338
            )
            
            
            6,146
            
            
            
            -Gain (loss) on sales of
      securities
            
            
            833
            
            
            
            780
            
            
            
            53
            
            
            
            (67
            )Total
            
            
            36,082
            
            
            
            30,015
            
            
            
            6,067
            
            
            
            33,471OREO gains (losses) on sale
            
            
            (1,725
            )
            
            
            (602
            )
            
            
            (1,123
            )
            
            
            27OREO valuation
      adjustments
            
            
            (18,562
            )
            
            
            (4,784
            )
            
            
            (13,778
            )
            
            
            -OREO loss on bulk sale
            
            
            (6,666
            )
            
            
            -
            
            
            
            (6,666
            )
            
            
            -Total
            
            
            (26,953
            )
            
            
            (5,386
            )
            
            
            (21,567
            )
            
            
            27Total noninterest income
            
            $
            9,129
            
            
            $
            24,629
            
            
            $
            (15,500
            )
            
            $
            33,498


26




---



Noninterest Expense. Noninterest expense was $108.3 million in 2009, $90.3 million in 2008,
and $85.3 million in 2007. Noninterest expense increased $18.0 million or 20% in
2009 compared to 2008, in large part due to a $13.1 million goodwill impairment
charge taken in the first quarter of 2009 and a $5.7 million increase in our
FDIC insurance premiums. Noninterest expense increased $5.0 million, or 6% in
2008 compared to 2007.




Personnel expenses decreased $2.9 million or
6% in 2009 compared to 2008 as a result of reductions in staff, lower commission
expense and lower expenses from stock incentive plans. Equipment expenses
increased $1.0 million in 2009 compared to 2008 as result of a review of fixed
assets and disposals of certain obsolete equipment. Due to continued cost
cutting initiatives and re-engineering workflows the Company also decreased
expenses associated with postage, printing and office supplies, marketing and
communication in 2009 compared to 2008. Personnel expenses decreased $2.3
million, or 5%, in 2008 compared to 2007 due to the elimination of bonuses,
employer matching of contributions to our 401(k) plan, and staff reductions.




Other noninterest expense increased $7.6
million in 2009 over 2008, primarily attributable to a $5.7 million increase in
FDIC insurance premiums and an increase in OREO maintenance and management
expenses of $1.4 million. Although we have made progress in reducing our OREO
property balance, we expect to see elevated expenses associated with OREO
properties continue in 2010. The increase in FDIC insurance expense included an
industry wide special assessment charge of $1.2 million, an increase in our
insurance premium assessment rate in 2009 over 2008, and higher insurance
premium expense associated with the TAG Program.




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.




The following table illustrates the
components and changes in noninterest expense for the periods shown:




(Dollars in thousands)
            
            Full year
            
            Full year
            
            2009 to 2008
            
            Full year2009
            
            2008
            
            Change
            
            2007Noninterest expenseSalaries and employee
      benefits
            
            $
            44,608
            
            $
            47,500
            
            $
            (2,892
            )
            
            $
            49,787Equipment
            
            
            8,120
            
            
            7,117
            
            
            1,003
            
            
            
            6,544Occupancy
            
            
            9,585
            
            
            9,440
            
            
            145
            
            
            
            8,548Payment systems related expense
            
            
            4,036
            
            
            3,622
            
            
            414
            
            
            
            3,143Professional fees
            
            
            4,342
            
            
            4,317
            
            
            25
            
            
            
            2,072Postage, printing and office supplies
            
            
            3,201
            
            
            3,834
            
            
            (633
            )
            
            
            3,896Marketing
            
            
            2,990
            
            
            3,583
            
            
            (593
            )
            
            
            4,524Communications
            
            
            1,574
            
            
            1,722
            
            
            (148
            )
            
            
            1,624Goodwill impairment
            
            
            13,059
            
            
            -
            
            
            13,059
            
            
            
            -Other noninterest expense
            
            
            16,773
            
            
            9,188
            
            
            7,585
            
            
            
            5,161Total noninterest expense
            
            $
            108,288
            
            $
            90,323
            
            $
            17,965
            
            
            $
            85,299


27




---



Income Taxes . The
Company recorded a benefit for income taxes of $19.3 million for the full year
2009 compared to $7.6 million for 2008. The tax benefit for 2009 was
significantly reduced by the establishment of a $21.0 million deferred tax asset
valuation allowance at year end 2009. The Company recorded tax expense of $7.1
million for 2007.




The following table shows the
components of the tax benefit for the periods shown:




2009 to 2008(Dollars in thousands)
            
            Full year
      2009
            
            Full year
      2008
            
            Change
            
            Full year
      2007Expense (benefit) for income taxes
      excluding deferred tax assetvaluation allowance
            
            $
            (40,275
            )
            
            $
            (7,598
            )
            
            
            32,677
            
            
            $
            7,121Provision for taxes from deferred tax assetvaluation allowance
            
            
            20,999
            
            
            
            -
            
            
            
            (20,999
            )
            
            
            -Total expense (benefit) for income
      taxes
            
            $
            (19,276
            )
            
            $
            (7,598
            )
            
            $
            11,678
            
            
            $
            7,121 As of December 31, 2009, the Company
determined that it was appropriate to establish a deferred tax asset valuation
allowance of $21.0 million, reducing its deferred tax asset to $3.2 million at
year end which is the amount that the Company has determined is more likely than
not to be realized. Any future reversals of the deferred tax asset valuation
allowance as a result of changes in the factors considered by management in
establishing the allowance, including any return to profitability, would
decrease the Company’s income tax expense and increase its after tax net income
in the periods in which a reversal is recorded. The Company does not expect to
record any future tax benefits until conditions allow the deferred tax valuation
allowance to be reversed.




The $32.7 million increase in the benefit for
taxes before the deferred tax asset valuation allowance was due to a $96.6
million increase in the pretax loss in 2009 compared to 2008. As the following
table illustrates, the expected amount of tax benefit on the Company’s 2009 loss
was $38.7 million. This expected tax benefit was reduced to $19.3 million due in
large part to the impact of the Company’s goodwill impairment and the
establishment of a deferred tax asset valuation allowance. The reconciliation
between the Company’s effective tax rate on income (loss) and the statutory rate
is as follows:




(Dollars in thousands)
            
            Year ended December
      31,2009
            
            2008
            
            2007Expected federal income tax (benefit) provision1
            
            $
            (38,671
            )
            
            $
            (4,730
            )
            
            $
            8,387State income tax, net of federal income tax effect
            
            
            (3,504
            )
            
            
            (769
            )
            
            
            561Interest on obligations of state and
      political subdivisionsexempt from federal tax
            
            
            (1,148
            )
            
            
            (1,302
            )
            
            
            (1,247
            )Federal low income housing tax credits
            
            
            (972
            )
            
            
            (880
            )
            
            
            (598
            )Bank owned life insurance
            
            
            (307
            )
            
            
            (309
            )
            
            
            (303
            )Stock options
            
            
            123
            
            
            
            177
            
            
            
            149Goodwill impairment
            
            
            4,570
            
            
            
            -
            
            
            
            -Change in deferred tax asset valuation allowance
            
            
            20,999
            
            
            
            -
            
            
            
            -Other, net
            
            
            (366
            )
            
            
            215
            
            
            
            172Total (benefit) provision for
      income taxes
            
            $
            (19,276
            )
            
            $
            (7,598
            )
            
            $
            7,121


1
            Federal income
      tax provision applied at 34% in 2008 and 35% in all other
      periods.





For more information
regarding the Company’s income taxes, see Note 17 “Income Taxes” to the
Company’s audited consolidated financial statements included under the section
“Financial Statements and Supplementary Data” in Item 8 of this report.




28




---



Balance Sheet Overview




Balance sheet highlights are as
follows:


- Total assets were $2.7 billion as
  of December 31, 2009, up from $2.5 billion at December 31, 2008;
- Total loans decreased by 17% or
  $340 million from the balance at December 31, 2008, in large part due to the
  $186 million or 65% decline in real estate construction loan balances during
  2009;
- Cash position and the investment
  securities portfolio grew over $600 million in 2009, from $263 million at
  December 31, 2008 to $865 million at December 31, 2009, reflecting improved
  liquidity; and
- Total deposits increased 6% or
  $123 million in 2009, driven by strong growth in low cost demand
  deposits.

Our long-term balance sheet management efforts
are focused on growth in targeted areas that support our corporate objectives
and include:


- Small business and middle
  market commercial lending;
- Owner occupied commercial
  real estate lending;
- Home equity lending;
  and
- Core deposit
  production.

Given the weak economy and housing
market in our operating area and our efforts to reduce the $99.3 million in
nonaccrual loan balances, we expect our overall construction loan portfolio will
continue to contract in 2010. We also expect to continue 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 growth 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.




Cash and Cash Equivalents




Total cash and cash equivalents
increased from $64.8 million at December 31, 2008 to $303.0 at December 31,
2009. This increase was caused by the combined effects of contracting loan
balances and the receipt of $139.2 million in net proceeds from our private
capital raise in October 2009. We anticipate continuing to invest a portion of
this cash into higher yielding investment securities and loans in 2010 while
maintaining strong liquidity ratios.




29




---



Investment Portfolio




The following table shows the
amortized cost and fair value of Bancorp’s investment portfolio. At December 31,
2009, Bancorp had no securities classified as held to maturity.




December 31,
      2009
            
            December 31,
      2008Net
            
            
            
            
            
            NetAmortized
            
            
            
            Unrealized
            
            Amortized
            
            
            
            Unrealized(Dollars in
      thousands)
            
            Cost
            
            Fair Value
            
            Gain/(Loss)
            
            Cost
            
            Fair Value
            
            Gain/(Loss)U.S. Treasury securities
            
            $
            24,907
            
            $
            25,007
            
            
            100
            
            
            $
            200
            
            $
            223
            
            
            23U.S. Government agency securities
            
            
            104,168
            
            
            103,988
            
            
            (180
            )
            
            
            7,310
            
            
            7,387
            
            
            77Corporate securities
            
            
            14,436
            
            
            9,753
            
            
            (4,683
            )
            
            
            12,608
            
            
            10,877
            
            
            (1,731
            )Mortgage-backed securities
            
            
            344,179
            
            
            344,294
            
            
            115
            
            
            
            94,846
            
            
            92,566
            
            
            (2,280
            )Obligations of state and political
      subdivisions
            
            
            67,651
            
            
            70,018
            
            
            2,367
            
            
            
            81,025
            
            
            82,398
            
            
            1,373Equity investments and other securities
            
            
            9,274
            
            
            9,217
            
            
            (57
            )
            
            
            5,161
            
            
            5,064
            
            
            (97
            )Total Investment Portfolio
            
            $
            564,615
            
            $
            562,277
            
            $
            (2,338
            )
            
            $
            201,150
            
            $
            198,515
            
            $
            (2,635
            ) At December 31, 2009, the estimated fair value
of the investment portfolio was $562.3 million, compared to $198.5 million at
2008 year end, an increase of $363.8 million or 183%. We increased our
investment securities balance as our loan balances contracted and to make
additional securities available to meet pledging requirements for public
deposits and government borrowing sources such as FHLB. The net unrealized loss
on the investment portfolio was $2.3 million at December 31, 2009, representing
..4% of the total portfolio compared to $2.6 million and 1.3%, respectively, at
year end 2008.




The Company 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, the Company 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, 2009, the Company determined there were no
other-than-temporarily impaired securities in the investment portfolio.




Our U.S. Treasury and U.S. Government agency
securities increased by $121.4 million from December 31, 2008, to December 31,
2009, as part of our effort to limit risk-weighted assets and to make additional
securities available to meet pledging requirements for public deposits and
government borrowing sources such as the FHLB.




Our corporate security portfolio had a $4.7
million unrealized loss at December 31, 2009. The majority of this loss was
associated with the decline in market value of our investments in pooled trust
preferred securities issued primarily by banks and insurance companies. An
increase in credit and liquidity spreads contributed to the unrealized loss
associated with these securities. These securities had a $13.9 million carrying
value with a $9.2 million fair value at December 31, 2009. At year end 2009,
these securities were rated CCC or better and have several features that reduce
credit risk, including seniority over certain tranches in the same pool and the
benefit of certain collateral coverage tests.




Our mortgage-backed securities portfolio
consisted of $314.8 million of U.S. agency backed mortgages and $29.5 million of
non-agency mortgages. The majority of our non-agency mortgage-backed securities
portfolio was comprised of securities secured by 15 year fully amortizing jumbo
loans. Approximately 91% of our non-agency mortgage-backed securities were rated
AA- or better. One $2.7 million security is rated BB. None of the mortgages
within this mortgage-backed security were delinquent at December 31, 2009.




Our portfolio of securities representing
obligations of state and political subdivisions had an estimated fair value of
$70.0 million, with an amortized cost of $67.6 million, indicating an unrealized
gain of $2.4 million. Consistent with the industry, the Company has experienced
a modest 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,
2009, the ratings associated with the securities in this segment were: 8% AAA,
52% AA, 25% A, 10% BBB and 5% non-rated. At December 31, 2008 the ratings were:
10% AAA, 52% AA, 21% A, 14% BBB and 3% non-rated.




In the third quarter of 2008, the Company
recorded OTTI charges totaling $6.3 million pre-tax consisting of $.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
investment and other securities investment category. The $3.1 million OTTI
charge associated with the two pooled trust preferred investments was
subsequently reversed as of March 31, 2009 upon the adoption of new accounting
guidance. In the first quarter of 2009, the Company recorded OTTI charges
totaling $.2 million pretax relating to two securities. These two investments
were sold in the second quarter of 2009 for no additional gain or loss.




30




---



For more information regarding the Company’s
fair value calculations, see Note 19 “Fair Value Measurement” to the Company’s
audited consolidated financial statements included under the section “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 afteror
    less
            
            Yield
            
            five
      years
            
            Yield
            
            ten
      years
            
            Yield
            
            ten
      years
            
            Yield
            
            Total
            
            YieldU.S. Treasury securities
            
            $
            10,101
            
            0.59
            %
            
            $
            14,906
            
            1.13
            %
            
            $
            -
            
            -
            
            
            $
            -
            
            -
            
            
            $
            25,007
            
            0.91
            %U.S. Government agency securities
            
            
            918
            
            3.26
            %
            
            
            92,495
            
            2.18
            %
            
            
            10,575
            
            2.00
            %
            
            
            -
            
            -
            
            
            
            103,988
            
            2.17
            %Obligations of state andpolitical subdivisions (1)
            
            
            5,297
            
            6.45
            %
            
            
            24,303
            
            5.77
            %
            
            
            29,377
            
            6.55
            %
            
            
            11,041
            
            5.77
            %
            
            
            70,018
            
            6.15
            %Other securities (2)
            
            
            8,505
            
            3.88
            %
            
            
            820
            
            4.15
            %
            
            
            79,635
            
            3.73
            %
            
            
            274,304
            
            3.57
            %
            
            
            363,264
            
            3.61
            %Total (1)
            
            $
            24,821
            
            3.07
            %
            
            $
            132,524
            
            2.74
            %
            
            $
            119,587
            
            4.27
            %
            
            $
            285,345
            
            3.65
            %
            
            $
            562,277
            
            3.69
            %


(1)
            
            Yields are stated on a federal tax
      equivalent basis at 35%.(2)
            
            Contractual maturities do not reflect
      prepayments on mortgage-backed and asset-backed securities.Actual
      durations are anticipated to be significantly shorter than contractual
      maturities.




The projected average life of
Bancorp’s investment portfolio decreased from 4.3 years at December 31, 2008 to
3.5 years at December 31, 2009. While the investment portfolio grew rapidly
during 2009, the Company elected to maintain a relatively short expected
duration in light of the historically low market interest rate environment.
Management may consider selling certain securities and realizing gains and/or
losses in the Company’s investment portfolio on an on-going basis as part of
Bancorp’s overall business strategy. For more information regarding Bancorp’s
investment securities, see Note 2 “Investment Securities” to the Company’s
audited consolidated financial statements included under the section “Financial
Statements and Supplementary Data” in Item 8 of this report.




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 prior
notice to the FHLB of five years for FHLB B stock or six months for FHLB A
stock. The Company analyzed FHLB stock for OTTI and concluded that no impairment
exists at December 31, 2009. This conclusion is based on FHLB’s capital ratios
in excess of regulatory minimums, strong liquidity position, and healthy net
interest income.




Loan Portfolio




The following table provides the composition
of the loan portfolio and the balance of our allowance for loan losses as of the
dates shown:




December
      31,(Dollars in thousands)
            
            2009
            
            2008
            
            2007
            
            2006
            
            2005Amount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            PercentCommercial
            
            $
            370,077
            
            
            21
            %
            
            $
            482,405
            
            
            23
            %
            
            $
            504,101
            
            
            23
            %
            
            $
            463,188
            
            
            24
            %
            
            $
            364,604
            
            
            23
            %Real estate construction
            
            
            99,310
            
            
            6
            %
            
            
            285,149
            
            
            14
            %
            
            
            517,988
            
            
            24
            %
            
            
            365,954
            
            
            19
            %
            
            
            210,828
            
            
            14
            %Real estate mortgage
            
            
            374,668
            
            
            22
            %
            
            
            393,208
            
            
            19
            %
            
            
            330,803
            
            
            15
            %
            
            
            287,495
            
            
            15
            %
            
            
            242,015
            
            
            16
            %Commercial real estate
            
            
            862,193
            
            
            50
            %
            
            
            882,092
            
            
            43
            %
            
            
            796,622
            
            
            37
            %
            
            
            804,865
            
            
            41
            %
            
            
            709,176
            
            
            45
            %Installment and otherconsumer
            
            
            18,594
            
            
            1
            %
            
            
            21,942
            
            
            1
            %
            
            
            23,155
            
            
            1
            %
            
            
            26,188
            
            
            1
            %
            
            
            27,831
            
            
            2
            %Total loans
            
            
            1,724,842
            
            
            100
            %
            
            
            2,064,796
            
            
            100
            %
            
            
            2,172,669
            
            
            100
            %
            
            
            1,947,690
            
            
            100
            %
            
            
            1,554,454
            
            
            100
            %Allowance for loan losses
            
            
            (38,490
            )
            
            2.23
            %
            
            
            (28,920
            )
            
            1.40
            %
            
            
            (46,917
            )
            
            2.16
            %
            
            
            (23,017
            )
            
            1.18
            %
            
            
            (20,469
            )
            
            1.32
            %Total loans, net
            
            $
            1,686,352
            
            
            
            
            
            $
            2,035,876
            
            
            
            
            
            $
            2,125,752
            
            
            
            
            
            $
            1,924,673
            
            
            
            
            
            $
            1,533,985


The Company’s loan portfolio was
$1.7 billion at December 31, 2009, a decrease of $340.0 million or 17% from
December 31, 2008. Total real estate construction loans contracted $185.8
million or 65% in 2009 compared to 2008. Total real estate construction loans
represented 6% of the loan portfolio at the end of the 2009, down from 14% at
December 31, 2008. At 50% of the loan portfolio, commercial real estate
represented the largest component of the portfolio at year end 2009. Interest
and fees earned on our loan portfolio is our primary source of revenue, and the
decline in loan balances has had a significant negative impact on interest
income and loan fees earned.




31




---



The following table presents the maturity
distribution and interest rate sensitivity of the Company’s loan portfolio by
category at December 31, 2009:




(Dollars in thousands)
            
            Commercial
            
            Real Estate
            
            Real Estate
            
            Real Estate
            
            InstallmentLoans
            
            Construction
            
            Mortgage
            
            Commercial
            
            and
      other
            
            TotalMaturity distribution:(1)Due within one year
            
            $
            190,288
            
            $
            96,585
            
            $
            28,067
            
            $
            51,562
            
            $
            4,713
            
            $
            371,215Due
      after one through five years
            
            
            138,447
            
            
            413
            
            
            59,144
            
            
            89,411
            
            
            5,903
            
            
            293,318Due after five years
            
            
            41,342
            
            
            2,312
            
            
            287,457
            
            
            721,220
            
            
            7,978
            
            
            1,060,309Total
            
            $
            370,077
            
            $
            99,310
            
            $
            374,668
            
            $
            862,193
            
            $
            18,594
            
            $
            1,724,842Interest rate sensitivity:Fixed-interest rate loans
            
            $
            107,016
            
            $
            36,255
            
            $
            115,944
            
            $
            196,574
            
            $
            10,126
            
            $
            465,915Floating or adjustable
      interest rate loans(2)
            
            
            263,061
            
            
            63,055
            
            
            258,724
            
            
            665,619
            
            
            8,468
            
            
            1,258,927Total
            
            $
            370,077
            
            $
            99,310
            
            $
            374,668
            
            $
            862,193
            
            $
            18,594
            
            $
            1,724,842


(1)
            
            The table is based on
      stated maturities, not expected maturities or durations.(2)
            
            Certain loans
      contain provisions which place maximum or minimum limits on interest rates
      or interest rate changes. Adjustable rate loans include all loans whose
      rates could change prior to
maturity


Loans held for sale at December 31,
2009, were $1.2 million compared to $2.9 million at December 31, 2008. 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.




At December 31, 2009, Bancorp had
$22.8 million in loans classified as troubled debt restructurings of which $11.7
million was on accrual status, with the remaining $11.1 million on nonaccrual
status. A total of $16.0 million in trouble debt restructurings were considered
impaired at December 31, 2009. Bancorp has no additional commitments to lend on
the troubled debt restructurings at December 31, 2009. Troubled debt
restructurings were $31.2 million at December 31, 2008, all of which were
nonstandard mortgages associated with our two-step loan program. The
modifications granted on troubled debt restructurings were due in part to
borrower financial difficulty, and generally provide for a temporary
modification of loan terms.




At December 31, 2009, and 2008, we
had $3.9 million and $22.9 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, 2009, and 2008, the Bank had no banker’s
acceptances.




Below is a discussion of our loan
portfolio by category.




32




---



Commercial. The
composition of commercial loans as of December 31, 2009 and December 31, 2008
was as follows:




Percent
      of
            
            
            
            
            
            Percent
            
            
            
            
            
            Percent(Dollars in
      thousands)
            
            December 31, 2009
            
            total
            
            December 31, 2008
            
            of
      total
            
            Change
            
            changeCommercial lines of credit:Total commitment
            
            $
            492,394
            
            
            
            
            
            $
            664,027
            
            
            
            
            
            $
            (171,633
            )
            
            -26
            %Outstanding balance
            
            
            221,779
            
            
            60
            %
            
            
            295,542
            
            
            61
            %
            
            
            (73,763
            )
            
            -25
            %Utilization %
            
            
            45.0
            %
            
            
            
            
            
            44.5
            %Commercial term loans:Total commitment
            
            $
            148,298
            
            
            
            
            
            $
            186,863
            
            
            
            
            
            $
            (38,565
            )
            
            -21
            %Outstanding balance
            
            
            148,298
            
            
            40
            %
            
            
            186,863
            
            
            39
            %
            
            
            (38,565
            )
            
            -21
            %Total commercial lines and
    loans:Total commitment
            
            $
            640,692
            
            
            
            
            
            $
            850,890
            
            
            
            
            
            $
            (210,198
            )
            
            -25
            %Outstanding balance
            
            
            370,077
            
            
            100
            %
            
            
            482,405
            
            
            100
            %
            
            
            (112,328
            )
            
            -23
            %


At December 31, 2009, total
commitment for commercial lines and loans was $640.7 million down from $850.9
million as of December 31, 2008. At December 31, 2009, the total balance of
commercial loans and lines was $370.1 million or approximately 21% of the
Company’s total loan portfolio. The commercial loan balance decreased by $112.3
million or 23% from $482.4 million at year end 2008. Commercial term loans
accounted for $148.3 million or 40% of the total outstanding balance while
$221.8 million or 60% consisted of commercial lines of credit. Commercial loans
are typically intermediate to long-term (two to ten years) secured credit used
to finance capital equipment or provide working capital while commercial lines
of credit are generally revolving loans typically used to finance short-term or
seasonal working capital needs.




The Company elected to limit new
loan originations to customers in certain sectors, including businesses related
to the housing industry, and decided to exit certain high risk client
relationships. However, in terms of our long term strategy we expect the
commercial loan portfolio to be an important contributor to growth in future
revenues and the capital raise will support our efforts to strategically pursue
opportunities in targeted commercial lending segments.




In originating commercial loans, our
underwriting standards may include maximum loan to value ratios, target levels
for debt service coverage and other financial covenants specific to the loan and
the borrower. Common forms of collateral pledged to secure our commercial loans
are real estate, accounts receivable, inventory, equipment, agricultural crops
and/or livestock and marketable securities. Commercial loans typically have
maximum terms of one to ten years and loan to value ratios in the range of 50%
to 80%.




33




---



Real Estate Construction. The composition of our real estate construction portfolio as of December
31, 2009, 2008, and 2007 is presented in the following table:




(Dollars in thousands)
            
            December 31, 2009
            
            December 31, 2008
            
            Change
            
            December 31, 2007Amount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            PercentCommercial construction
            
            $
            29,615
            
            
            30
            %
            
            $
            92,615
            
            
            32
            %
            
            $
            (63,000
            )
            
            -68
            %
            
            $
            90,670
            
            
            17
            %Two-step residential construction loans
            
            
            2,407
            
            
            2
            %
            
            
            53,084
            
            
            19
            %
            
            
            (50,677
            )
            
            -95
            %
            
            
            262,952
            
            
            51
            %Residential construction to
      builders
            
            
            44,786
            
            
            45
            %
            
            
            71,296
            
            
            25
            %
            
            
            (26,510
            )
            
            -37
            %
            
            
            80,737
            
            
            16
            %Residential subdivision or site development
            
            
            22,590
            
            
            23
            %
            
            
            68,485
            
            
            24
            %
            
            
            (45,895
            )
            
            -67
            %
            
            
            84,620
            
            
            16
            %Net deferred fees
            
            
            (88
            )
            
            0
            %
            
            
            (331
            )
            
            0
            %
            
            
            243
            
            
            -73
            %
            
            
            (991
            )
            
            0
            %Total real estate construction
      loans
            
            $
            99,310
            
            
            100
            %
            
            $
            285,149
            
            
            100
            %
            
            $
            (185,839
            )
            
            -65
            %
            
            $
            517,988
            
            
            100
            %


At December 31, 2009, the balance of
real estate construction loans was $99.3 million, down $185.8 million or 65%
from $285.1 million at December 31, 2008, which in turn was down from $518.0
million at December 31, 2007. Our construction loan portfolio has contracted
dramatically as a result of real estate market conditions and our efforts to
work through problems caused by our two-step residential construction loan
program.




Real estate construction loans to
builders are generally secured by the property underlying the project that is
being financed. Construction loans to builders and developers typically have
terms from 12 to 24 months and initial loan to value ratios in the range of 60%
to 85% based on the estimated value at the time of loan origination of the
collateral to be built.




At December 31, 2009, the Bank was
within the Interagency Guidelines for Real Estate Lending and the Commercial
Real Estate Lending Joint Guidance policy guidelines for concentrations in
construction relative to the sum of Tier 1 capital and allowance for credit
losses.




Additional detail regarding
construction and land loans is provided in the tables below. Land loans are
carried in the Bank’s residential mortgage and commercial real estate
portfolios, depending on the purpose of the loan, but such loans are included
below due to their relationship to construction loans generally.




34




---



The composition of the residential
construction and land loan portfolio by purpose of loan is as follows as of the
dates shown:




West Coast BancorpConstruction and land loans(Dollars in thousands)
            
            December 31,
      2009
            
            December 31,
      2008
            
            September 30,
      2009Amount
            
            Percent2
            
            Amount
            
            Percent2
            
            Amount
            
            Percent2Land loans1
            
            $
            35,396
            
            26
            %
            
            $
            46,286
            
            14
            %
            
            $
            35,645
            
            19
            %Residential construction loans other than two-step loans
            
            
            67,376
            
            50
            %
            
            
            136,024
            
            42
            %
            
            
            100,829
            
            54
            %Two-step residential construction
      loans
            
            
            2,407
            
            2
            %
            
            
            53,084
            
            16
            %
            
            
            5,128
            
            3
            %Commercial construction loans
            
            
            29,615
            
            22
            %
            
            
            92,616
            
            28
            %
            
            
            43,991
            
            24
            %Total construction and land
      loans
            
            $
            134,794
            
            100
            %
            
            $
            328,010
            
            100
            %
            
            $
            185,593
            
            100
            %Components of residential construction
      and land loansLand loans1
            
            $
            14,909
            
            18
            %
            
            $
            23,495
            
            11
            %
            
            $
            14,783
            
            12
            %Site development
            
            
            22,590
            
            26
            %
            
            
            64,728
            
            30
            %
            
            
            45,566
            
            38
            %Vertical construction
            
            
            47,193
            
            56
            %
            
            
            124,380
            
            59
            %
            
            
            60,391
            
            50
            %Total residential construction
      and land loans
            
            $
            84,692
            
            100
            %
            
            $
            212,603
            
            100
            %
            
            $
            120,740
            
            100
            %Components of commercial construction
      and land loans:Land loans1
            
            $
            20,487
            
            41
            %
            
            $
            22,791
            
            20
            %
            
            $
            20,862
            
            32
            %Site development
            
            
            607
            
            1
            %
            
            
            607
            
            1
            %
            
            
            607
            
            1
            %Vertical construction
            
            
            29,008
            
            58
            %
            
            
            92,009
            
            79
            %
            
            
            43,384
            
            67
            %Total commercial construction
      and land loans
            
            $
            50,102
            
            100
            %
            
            $
            115,407
            
            100
            %
            
            $
            64,853
            
            100
            %Components of total construction and
      land loansLand loans1
            
            $
            35,396
            
            26
            %
            
            $
            46,286
            
            14
            %
            
            $
            35,645
            
            19
            %Site development
            
            
            23,197
            
            17
            %
            
            
            65,335
            
            20
            %
            
            
            46,173
            
            25
            %Vertical construction
            
            
            76,201
            
            57
            %
            
            
            216,389
            
            66
            %
            
            
            103,775
            
            56
            %Total construction and land
      loans
            
            $
            134,794
            
            100
            %
            
            $
            328,010
            
            100
            %
            
            $
            185,593
            
            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 over half of total real estate
construction and land loans, while the commercial construction and land loan
categories accounted for 22% and 26%, respectively. At $35.4 million, land loans
represented approximately 2% of the Company’s total loan portfolio at December
31, 2009.




In terms of the combined
construction and land portfolio, $76.2 million or 57% was for vertical
construction purposes, with the land component at 26% and site development at
17%. Vertical construction accounted for the majority of the loans within both
the residential and commercial categories. 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.




35




---



Real Estate
Mortgage . The following
table presents the components of our real estate mortgage loan portfolio:




(Dollars in thousands)
            
            December 31,
      2009
            
            December 31,
      2008
            
            Change
            
            December 31,
      2007Amount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            PercentMortgage
            
            $
            74,977
            
            20
            %
            
            $
            87,628
            
            22
            %
            
            $
            (12,651
            )
            
            -14
            %
            
            $
            86,901
            
            26
            %Nonstandard mortgage product
            
            
            20,108
            
            5
            %
            
            
            32,597
            
            8
            %
            
            
            (12,489
            )
            
            -38
            %
            
            
            7,495
            
            2
            %Home equity loans and lines of
      credit
            
            
            279,583
            
            75
            %
            
            
            272,983
            
            70
            %
            
            
            6,600
            
            
            2
            %
            
            
            236,407
            
            72
            %Total real estate mortgage
            
            $
            374,668
            
            100
            %
            
            $
            393,208
            
            100
            %
            
            $
            (18,540
            )
            
            -5
            %
            
            $
            330,803
            
            100
            %


At December 31, 2009, the total real
estate mortgage loan balance was $374.7 million or approximately 22% of the
Company’s total loan portfolio. This included $20.1 million in our nonstandard
mortgage product, a decline from $32.6 million at December 31, 2008 due to few
nonstandard mortgage loan originations in 2009, charge-offs, and borrower pay
downs. At December 31, 2009, mortgage loans measured $75.0 million or 20% of
total real estate mortgage loans, $30.3 million of which were standard
residential mortgage loans to homeowners and the remaining $44.7 million
associated with commercial interests utilizing residences as collateral. Such
commercial interests included $24.0 million related to businesses, $7.1 million
related to condominiums, and $10.4 million related to residential
land.




Home equity lines and loans
represented 75% or $279.6 million 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 through our branches. The home equity portfolio
grew steadily over the past few years as a result of focused and on-going
marketing efforts. However, originations and balance growth within the portfolio
slowed in 2009 as a result of the Bank’s ongoing analysis of market conditions
and corresponding adjustments made to our pricing and underwriting standards and
reduced customer demand. As shown below, the home equity line utilization
percentage averaged approximately 62% for loans originated in 2009, which was
generally consistent with loans originated in the prior four years.




(Dollars in thousands)
            
            Year of
      Origination2003&2009
            
            2008
            
            2007
            
            2006
            
            2005
            
            2004
            
            Earlier
            
            TotalHome
      Equity LinesCommitments
            
            $
            33,421
            
            
            $
            64,847
            
            
            $
            82,188
            
            
            $
            84,833
            
            
            $
            62,097
            
            
            $
            29,200
            
            
            $
            57,658
            
            
            $
            414,244Outstanding Balance
            
            
            20,814
            
            
            
            39,926
            
            
            
            52,946
            
            
            
            52,788
            
            
            
            39,055
            
            
            
            15,989
            
            
            
            28,206
            
            
            
            249,724Utilization at year end
            
            
            62.3
            %
            
            
            61.6
            %
            
            
            64.4
            %
            
            
            62.2
            %
            
            
            62.9
            %
            
            
            54.8
            %
            
            
            48.9
            %
            
            
            60.3
            %Home
      Equity LoansOutstanding Balance
            
            
            3,515
            
            
            
            8,148
            
            
            
            6,563
            
            
            
            4,618
            
            
            
            1,267
            
            
            
            1,079
            
            
            
            3,182
            
            
            
            28,372Total Home Equity Outstanding
            
            $
            24,329
            
            
            $
            48,074
            
            
            $
            59,509
            
            
            $
            57,406
            
            
            $
            40,322
            
            
            $
            17,068
            
            
            $
            31,388
            
            
            $
            278,096
            (1)


(1)
            
            For the purposes of utilization
      percentages, the outstanding balance does not include deferred costs and
      fees of $1.5 million




As indicated in the table below, the
average Beacon score for borrowers in the home equity line and loan portfolios
were 763 and 732, respectively at December 31, 2009. To date, the delinquencies
and charge-offs have remained relatively modest within these portfolios. The
original average loan-to-value ratios of 63% and 62% 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%. There were a significant
amount of loans and deposits derived from our home equity borrowers at year end
2009, which we believe were a result of our home equity line and loan portfolios
being sourced to relationship customers through our branch network.




36




---



The following table presents an overview of
home equity lines of credit and loans as of the dates shown:




(Dollars in
      thousands)
            
            December 31, 2009
            
            December 31, 2008Lines
            
            Loans
            
            Lines
            
            LoansTotal Outstanding Balance
            
            $
            251,062
            
            
            $
            28,521
            
            
            $
            239,457
            
            
            $
            33,526Average Current Beacon Score
            
            
            763
            
            
            
            732
            
            
            
            763
            
            
            
            729Delinquent % 30 Days or
Greater
            
            
            0.21
            %
            
            
            0.80
            %
            
            
            0.04
            %
            
            
            0.22
            %% Net Charge-Offs (Recoveries) Year to Date
            
            
            0.87
            %
            
            
            4.40
            %
            
            
            0.05
            %
            
            
            0.28
            %% 1st Lien Position
            
            
            37
            %
            
            
            39
            %
            
            
            34
            %
            
            
            39
            %% 2nd Lien Position
            
            
            63
            %
            
            
            61
            %
            
            
            66
            %
            
            
            61
            %Overall Original Loan-to-Value
            
            
            63
            %
            
            
            62
            %
            
            
            65
            %
            
            
            64
            %Original Loan-to-Value <
80%
            
            
            77
            %
            
            
            68
            %
            
            
            75
            %
            
            
            66
            %Original Loan-to-Value > 80, < 90%
            
            
            22
            %
            
            
            25
            %
            
            
            24
            %
            
            
            28
            %Original Loan-to-Value > 90, <
      100%
            
            
            1
            %
            
            
            7
            %
            
            
            1
            %
            
            
            6
            %100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %Total Related Loans and Deposit Dollars
      1
            
            $
            332,922
            
            
            $
            23,163
            
            
            $
            367,956
            
            
            $
            20,857


1
            
            These amounts
      represent loans other than home equity and deposit balances associated
      with our customers who have a home equity line or
  loan.





The following table shows home
equity lines of credit and loans by metropolitan service areas and indicates a
geographic distribution of balances fairly representative of our branch presence
in these markets:




(Dollars in thousands)
            
            December 31,
      2009
            
            December 31,
      2008Percent of
            
            
            
            
            Percent ofRegion
            
            Amount
            
            total
            
            Amount
            
            totalPortland-Beaverton, Oregon / Vancouver,
      Washington
            
            $
            135,647
            
            48.5
            %
            
            $
            131,441
            
            48.1
            %Salem, Oregon
            
            
            64,241
            
            23.0
            %
            
            
            64,729
            
            23.7
            %Oregon non-metropolitan area
            
            
            27,333
            
            9.8
            %
            
            
            25,624
            
            9.4
            %Olympia, Washington
            
            
            18,803
            
            6.7
            %
            
            
            17,620
            
            6.5
            %Washington non-metropolitan
    area
            
            
            15,541
            
            5.6
            %
            
            
            15,871
            
            5.8
            %Bend, Oregon
            
            
            5,665
            
            2.0
            %
            
            
            5,825
            
            2.1
            %Other
            
            
            12,353
            
            4.4
            %
            
            
            11,873
            
            4.4
            %Total home equity loan and
      line portfolio
            
            $
            279,583
            
            100.0
            %
            
            $
            272,983
            
            100.0
            %


The majority of our home equity
lines and loans are secured by homes in the Portland-Beaverton, Oregon,
Vancouver, Washington and Salem, Oregon markets where also most of our branches
are located.




37




---



Commercial Real Estate. The composition of commercial real estate loan types based on collateral
is as follows:




(Dollars in thousands)
            
            December 31,
      2009
            
            December 31,
      2008Amount
            
            Percent
            
            Amount
            
            PercentOffice Buildings
            
            $
            193,233
            
            22.4
            %
            
            $
            195,033
            
            22.1
            %Retail Facilities
            
            
            114,697
            
            13.3
            %
            
            
            118,072
            
            13.4
            %Commercial/Agricultural
            
            
            62,366
            
            7.2
            %
            
            
            65,177
            
            7.4
            %Medical Offices
            
            
            61,636
            
            7.1
            %
            
            
            59,386
            
            6.7
            %Industrial parks and related
            
            
            55,955
            
            6.5
            %
            
            
            58,514
            
            6.6
            %Manufacturing Plants
            
            
            55,216
            
            6.4
            %
            
            
            42,102
            
            4.8
            %Multi-Family - 5+ Residential
            
            
            50,498
            
            5.9
            %
            
            
            62,111
            
            7.1
            %Hotels/Motels
            
            
            37,829
            
            4.4
            %
            
            
            36,478
            
            4.1
            %Assisted Living
            
            
            26,600
            
            3.1
            %
            
            
            20,360
            
            2.3
            %Land Development and Raw Land
            
            
            26,594
            
            3.1
            %
            
            
            31,582
            
            3.6
            %Mini Storage
            
            
            25,778
            
            3.0
            %
            
            
            27,725
            
            3.2
            %Food Establishments
            
            
            18,108
            
            2.1
            %
            
            
            18,897
            
            2.1
            %Other
            
            
            133,683
            
            15.5
            %
            
            
            146,655
            
            16.6
            %Total commercial real estate loans
            
            $
            862,193
            
            100.0
            %
            
            $
            882,092
            
            100.0
            %


The commercial real estate portfolio
decreased $19.9 million or 2% during 2009. While prepayments of loans were very
low in 2009, new commercial real estate loan originations were also lower than
in recent years reflecting difficult market conditions and our desire to reduce
risk-weighted asset balances prior to the private capital raise in October 2009.
Despite lower origination activity, the absence of an active secondary market
provided an opportunity to improve pricing and transaction terms during 2009. At
year end 2009, office buildings and retail facilities accounted for 36% of the
collateral securing the commercial real estate portfolio, similar to that of
year end 2008. The Company’s underwriting of commercial real estate loans
generally includes loan to value ratios at origination not exceeding 75% and
debt service coverage ratios at 120% or better.




The composition of the commercial
real estate loan portfolio by occupancy type is as follows:




December
      31,
            
            December
      31,
            
            Change(Dollars in thousands)
            
            2009
            
            2008
            
            
            
            
            
            MixAmount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            PercentOwner occupied
            
            $
            423,031
            
            49
            %
            
            $
            416,817
            
            47
            %
            
            $
            6,214
            
            
            1
            %Non-owner occupied
            
            
            439,162
            
            51
            %
            
            
            465,275
            
            53
            %
            
            
            (26,113
            )
            
            -6
            %Total commercial real estate
      loans
            
            $
            862,193
            
            100
            %
            
            $
            882,092
            
            100
            %
            
            $
            (19,899
            )


38




---



The owner occupied commercial real
estate segment increased slightly in 2009, while the non-owner occupied segment
contracted 6% as we focused on reducing our exposure to this segment. We believe
the commercial real estate portfolio to be a relatively mature portfolio with an
average loan to value of approximately 51% at the time of origination for the
non-owner occupied segment. Due to the weak economic conditions we anticipate
the non-owner occupied portion of our commercial real estate portfolio will
continue to decline in 2010.




The following table shows the
commercial real estate portfolio by current property location:




(Dollars in thousands)
            
            December 31,
      2009Number of
            
            Percent ofRegion
            
            Amount
            
            loans
            
            totalPortland-Beaverton, Oregon / Vancouver,
      Washington
            
            $
            457,231
            
            768
            
            53.0
            %Salem, Oregon
            
            
            153,171
            
            426
            
            17.8
            %Oregon non-metropoliton area
            
            
            65,166
            
            182
            
            7.6
            %Seattle-Tacoma-Bellevue, Washington
            
            
            40,874
            
            48
            
            4.7
            %Washington non-metropoliton
    area
            
            
            32,825
            
            122
            
            3.8
            %Olympia, Washington
            
            
            27,000
            
            79
            
            3.1
            %Bend, Oregon
            
            
            25,722
            
            28
            
            3.0
            %Other
            
            
            60,204
            
            97
            
            7.0
            %Total commercial real estate loans
            
            $
            862,193
            
            1,750
            
            100.0
            %


As shown in the table above, the
distribution of our commercial real estate portfolio at year end 2009 reflected
our branch distribution presence in our operating markets.




The following table shows the
commercial real estate portfolio by year of stated maturity:




December 31,
      2009Number of
            
            Percent of(Dollars in thousands)
            
            Amount
            
            loans
            
            total2010
            
            $
            63,280
            
            100
            
            7.3
            %2011
            
            
            40,323
            
            79
            
            4.7
            %2012 and after
            
            
            758,590
            
            1,571
            
            88.0
            %Total commercial real estate
      loans
            
            $
            862,193
            
            1,750
            
            100.0
            %


At year end 2009, the stated loan
maturities in 2010 and 2011 totaled $103.6 million or a relatively modest 12% of
the $862.2 million total commercial real estate portfolio.




39




---



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 continued 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. 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 on a timely
basis, 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 2010 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, tracking financial
trends, evaluating collateral, monitoring covenant compliance, and evaluating
the financial capacity of guarantors. Collectively, these activities represent
an ongoing process that results in an assessment of credit risk associated with
each commercial, real estate construction and commercial real estate loan
consistent with our internal risk rating guidelines. Our risk rating process is
a central component in estimating the required allowance for credit losses, as
discussed in the Allowance for Credit Losses section which follows. Credit files
are also examined periodically on a sample test basis by our credit review
department and internal auditors, as well as by regulatory
examiners.




Although a risk of nonpayment exists with
respect to all loans, certain specific types of risks are associated with
different types of loans. The expected source of repayment of 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.




40




---



Nonperforming Assets and
Delinquencies




Nonperforming assets.  The following table
presents information with respect to nonperforming assets as of the dates shown:




December
      31,(Dollars in thousands)
            
            2009
            
            2008
            
            2007
            
            2006
            
            2005Commercial
            
            $
            36,211
            
            
            $
            6,250
            
            
            $
            2,401
            
            
            $
            385
            
            
            $
            625Real estate construction:Commercial real estate construction
            
            
            1,488
            
            
            
            2,922
            
            
            
            -
            
            
            
            -
            
            
            
            -Residential real estate
      construction
            
            
            22,373
            
            
            
            90,712
            
            
            
            22,121
            
            
            
            567
            
            
            
            -Total real estate construction
            
            
            23,861
            
            
            
            93,634
            
            
            
            22,121
            
            
            
            567
            
            
            
            -Real estate mortgage:Mortgage
            
            
            11,563
            
            
            
            8,283
            
            
            
            552
            
            
            
            -
            
            
            
            -Nonstandard mortgage
            
            
            8,752
            
            
            
            15,229
            
            
            
            -
            
            
            
            -
            
            
            
            -Home equity
            
            
            2,036
            
            
            
            1,043
            
            
            
            -
            
            
            
            -
            
            
            
            228Real estate mortgage
            
            
            22,351
            
            
            
            24,555
            
            
            
            552
            
            
            
            -
            
            
            
            228Commercial real estate
            
            
            16,778
            
            
            
            3,145
            
            
            
            1,353
            
            
            
            516
            
            
            
            231Installment and other consumer
            
            
            144
            
            
            
            6
            
            
            
            -
            
            
            
            -
            
            
            
            4Total loans on nonaccrual status
            
            
            99,345
            
            
            
            127,590
            
            
            
            26,427
            
            
            
            1,468
            
            
            
            1,088Loans past due 90 days or more but not onnonaccrual status
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Other real estate owned
            
            
            53,594
            
            
            
            70,110
            
            
            
            3,255
            
            
            
            -
            
            
            
            -Total nonperforming
      assets
            
            $
            152,939
            
            
            $
            197,700
            
            
            $
            29,682
            
            
            $
            1,468
            
            
            $
            1,088Percentage of nonperforming assets
      tototal assets
            
            
            5.60
            %
            
            
            7.86
            %
            
            
            1.12
            %
            
            
            0.06
            %
            
            
            0.05
            %Total assets
            
            $
            2,733,547
            
            
            $
            2,516,140
            
            
            $
            2,646,614
            
            
            $
            2,465,372
            
            
            $
            1,997,138


Nonperforming assets consist of
nonaccrual loans, loans past due more than 90 days and still accruing interest,
and OREO. At December 31, 2009, total nonperforming assets were $152.9 million,
or 5.6% of total assets, which was down from $197.7 million, or 7.86% of total
assets, at December 31, 2008. The balance of total nonperforming assets
reflected write downs totaling over $90 million or 38% from the original loan
principal balance. The decline in total nonperforming assets in 2009 was caused
by the combination of OREO sales and net charge-offs exceeding the inflow of
nonaccrual loans. Total nonaccrual loans declined by $28.2 million to $99.3
million at December 31, 2009, from $127.6 million at year end 2008. Nonaccrual
construction loans fell $68.3 million to $22.4 million, which was partly offset
by increases in nonaccrual commercial and commercial real estate loans of $29.9
million and $13.7 million, respectively. Nonstandard mortgage loans on
nonaccrual status contracted to $8.8 million from $15.2 million a year ago.




Generally, loans are placed on
nonaccrual status and no interest is accrued when factors indicate collection of
interest or principal in accordance with the contractual terms is doubtful or
when the principal or interest payment becomes 90 days past due. For such loans,
previously accrued but uncollected interest is reversed and charged against
current earnings and additional income is only recognized to the extent payments
are subsequently received and the loan is placed back on accrual status.
Interest income foregone on nonaccrual loans was approximately $10.7 million,
$13.6 million, and $1.4 million in 2009, 2008, and 2007, respectively.




During our normal loan review
process, 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 off to the
allowance for loan losses when management believes, after considering economic,
market, and business conditions, collection efforts, collateral position, and
other factors deemed relevant, that the borrower’s financial condition is such
that collection of principal and interest is not probable.




For the years ended December 31,
2009, 2008, and 2007, interest income recognized on impaired loans totaled
$526,000, $1,195,000, and $23,000, respectively, all of which was recognized on
a cash basis. Interest income on loans is accrued daily on the principal balance
outstanding.




41




---



Nonaccrual construction and land loans. The following table shows the components of
our nonaccrual construction and land loans as of the dates shown.




West Coast BancorpNonaccrual construction and land
      loans(Dollars in thousands)
            
            December 31,
      2009
            
            December 31,
      2008
            
            September 30,
      2009Percent of
            
            
            
            
            Percent of
            
            
            
            
            Percent ofAmount
            
            loan
      category2
            
            Amount
            
            loan
      category2
            
            Amount
            
            loan
      category2Land loans1
            
            $
            7,716
            
            21.8
            %
            
            $
            5,794
            
            12.5
            %
            
            $
            9,232
            
            25.9
            %Residential construction loans other than two-step loans
            
            
            19,966
            
            29.6
            %
            
            
            36,994
            
            27.2
            %
            
            
            37,149
            
            36.8
            %Two-step construction loans
            
            
            2,407
            
            100.0
            %
            
            
            49,960
            
            94.1
            %
            
            
            5,128
            
            100.0
            %Commercial construction loans
            
            
            1,488
            
            5.0
            %
            
            
            2,922
            
            3.2
            %
            
            
            2,449
            
            5.6
            %Total nonaccrual construction
      and land loans
            
            $
            31,577
            
            23.4
            %
            
            $
            95,670
            
            29.2
            %
            
            $
            53,958
            
            29.1
            %Components of nonaccrual residential
      construction and land loans:Land loans1
            
            $
            6,440
            
            43.2
            %
            
            $
            5,608
            
            23.9
            %
            
            $
            8,236
            
            55.7
            %Site development
            
            
            8,334
            
            36.9
            %
            
            
            27,291
            
            42.2
            %
            
            
            26,785
            
            58.8
            %Vertical construction
            
            
            14,040
            
            29.8
            %
            
            
            59,663
            
            48.0
            %
            
            
            15,492
            
            25.7
            %Total nonaccrual residential construction and land loansother than two-step loans
            
            $
            28,814
            
            34.0
            %
            
            $
            92,562
            
            20.0
            %
            
            $
            50,513
            
            41.8
            %Components of nonaccrual commercial
      construction and land loans:Land loans1
            
            
            1,276
            
            6.2
            %
            
            
            186
            
            0.8
            %
            
            
            996
            
            4.8
            %Site development
            
            
            -
            
            0.0
            %
            
            
            -
            
            0.0
            %
            
            
            -
            
            0.0
            %Vertical construction
            
            
            1,487
            
            5.1
            %
            
            
            2,922
            
            3.2
            %
            
            
            2,449
            
            5.6
            %Total nonaccrual commercial
      construction and land loans
            
            $
            2,763
            
            5.5
            %
            
            $
            3,108
            
            2.7
            %
            
            $
            3,445
            
            5.3
            %Components of total nonaccrual
      construction and land loans:Land loans1
            
            $
            7,716
            
            21.8
            %
            
            $
            5,794
            
            12.5
            %
            
            $
            9,232
            
            25.9
            %Site development
            
            
            8,334
            
            35.9
            %
            
            
            27,291
            
            41.8
            %
            
            
            26,785
            
            58.0
            %Vertical construction
            
            
            15,527
            
            20.4
            %
            
            
            62,585
            
            28.9
            %
            
            
            17,941
            
            17.3
            %Total nonaccrual construction
      and land loans
            
            $
            31,577
            
            23.4
            %
            
            $
            95,670
            
            29.2
            %
            
            $
            53,958
            
            29.1
            %


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 indicated in the above table and reflecting
the difficulties in the housing market, $28.8 million of the $31.6 million in
total nonaccrual construction and land loan balances portfolio related to the
residential category. Total nonaccrual residential construction and land loans
declined 69% from $92.6 million at year end 2008 consistent with our overall
total residential construction and land loan balances also contracting
significantly during 2009. Nonaccrual commercial construction and land loans
were $2.8 million or 5.5% of such loans at December 31, 2009.




42




---



OREO. The following
table presents activity in the total OREO portfolio for the periods
shown:




(Dollars in thousands)
            
            Two-step related OREO activity
            
            Non two-step related OREO
            
            Total OREO related activityAmount
            
            Number
            
            Amount
            
            Number
            
            Amount
            
            
            NumberFull
      year 2008:Beginning balance January 1, 2008
            
            $
            3,255
            
            
            14
            
            
            $
            -
            
            
            1
            
            
            $
            3,255
            
            
            15Additions to OREO
            
            
            75,863
            
            
            294
            
            
            
            11,936
            
            
            42
            
            
            
            87,799
            
            
            336Capitalized
    improvements
            
            
            1,319
            
            
            
            
            
            
            10
            
            
            
            
            
            
            1,329Valuation adjustments
            
            
            (4,286
            )
            
            
            
            
            
            (499
            )
            
            
            
            
            
            (4,785
            )Disposition of OREO
      properties
            
            
            (16,129
            )
            
            (57
            )
            
            
            (1,359
            )
            
            (6
            )
            
            
            (17,488
            )
            
            (63
            )Ending balance Dec. 31, 2008
            
            $
            60,022
            
            
            251
            
            
            $
            10,088
            
            
            37
            
            
            $
            70,110
            
            
            288Quarterly 2009:Beginning balance January 1, 2009
            
            
            60,022
            
            
            251
            
            
            
            10,088
            
            
            37
            
            
            
            70,110
            
            
            288Additions to OREO
            
            
            20,635
            
            
            62
            
            
            
            4,614
            
            
            17
            
            
            
            25,249
            
            
            79Capitalized
    improvements
            
            
            668
            
            
            
            
            
            
            14
            
            
            
            
            
            
            682Valuation adjustments
            
            
            (4,110
            )
            
            
            
            
            
            (651
            )
            
            
            
            
            
            (4,761
            )Disposition of OREO
      properties
            
            
            (3,896
            )
            
            (17
            )
            
            
            (195
            )
            
            (1
            )
            
            
            (4,091
            )
            
            (18
            )Ending balance March 31, 2009
            
            $
            73,319
            
            
            296
            
            
            $
            13,870
            
            
            53
            
            
            $
            87,189
            
            
            349Additions to OREO
            
            
            9,822
            
            
            33
            
            
            
            3,841
            
            
            15
            
            
            
            13,663
            
            
            48Capitalized
    improvements
            
            
            1,080
            
            
            
            
            
            
            76
            
            
            
            
            
            
            1,156Valuation adjustments
            
            
            (2,320
            )
            
            
            
            
            
            (744
            )
            
            
            
            
            
            (3,064
            )Disposition of OREO
      properties
            
            
            (12,269
            )
            
            (51
            )
            
            
            (2,845
            )
            
            (11
            )
            
            
            (15,114
            )
            
            (62
            )Ending balance June 30, 2009
            
            $
            69,632
            
            
            278
            
            
            $
            14,198
            
            
            57
            
            
            $
            83,830
            
            
            335Additions to OREO
            
            
            2,130
            
            
            9
            
            
            
            8,979
            
            
            27
            
            
            
            11,109
            
            
            36Capitalized
    improvements
            
            
            869
            
            
            
            
            
            
            86
            
            
            
            
            
            
            955Valuation adjustments
            
            
            (3,347
            )
            
            
            
            
            
            (450
            )
            
            
            
            
            
            (3,797
            )Disposition of OREO
      properties
            
            
            (12,728
            )
            
            (54
            )
            
            
            (2,799
            )
            
            (16
            )
            
            
            (15,527
            )
            
            (70
            )Ending balance Sept. 30, 2009
            
            $
            56,556
            
            
            233
            
            
            $
            20,014
            
            
            68
            
            
            $
            76,570
            
            
            301Additions to OREO
            
            
            2,137
            
            
            10
            
            
            
            22,016
            
            
            526
            
            
            
            24,153
            
            
            536Capitalized
    improvements
            
            
            2,033
            
            
            
            
            
            
            107
            
            
            
            
            
            
            2,140Valuation adjustments
            
            
            (4,927
            )
            
            
            
            
            
            (2,013
            )
            
            
            
            
            
            (6,940
            )Disposition of OREO
      properties
            
            
            (30,137
            )
            
            (121
            )
            
            
            (12,192
            )
            
            (44
            )
            
            
            (42,329
            )
            
            (165
            )Ending balance Dec. 31, 2009
            
            $
            25,662
            
            
            122
            
            
            $
            27,932
            
            
            550
            
            
            $
            53,594
            
            
            672Full
      year 2009:Beginning balance January 1, 2009
            
            $
            60,022
            
            
            251
            
            
            $
            10,088
            
            
            37
            
            
            $
            70,110
            
            
            288Additions to OREO
            
            
            34,724
            
            
            114
            
            
            
            39,450
            
            
            585
            
            
            
            74,174
            
            
            699Capitalized
    improvements
            
            
            4,650
            
            
            
            
            
            
            283
            
            
            
            
            
            
            4,933Valuation adjustments
            
            
            (14,704
            )
            
            
            
            
            
            (3,858
            )
            
            
            
            
            
            (18,562
            )Disposition of OREO
      properties
            
            
            (59,030
            )
            
            (243
            )
            
            
            (18,031
            )
            
            (72
            )
            
            
            (77,061
            )
            
            (315
            )Ending balance
      Dec. 31, 2009
            
            $
            25,662
            
            
            122
            
            
            $
            27,932
            
            
            550
            
            
            $
            53,594
            
            
            672


OREO is real property that the Bank has taken
possession either through a deed-in-lieu of foreclosure, non-judicial
foreclosure, judicial foreclosure or similar process in full or partial
satisfaction of a loan or loans. During 2009 the Company sold 315 OREO
properties, 243 of which were related to the two-step loan program, with a total
book value of $77.1 million. This included a fourth quarter bulk sale of 69
properties with a book value of $18.9 million. The Company recorded a loss of
$6.7 million on its bulk OREO sale.




At December 31, 2009, the Company had 672 OREO
properties with a total net book value of $53.6 million. Of these, 122
properties were related to the two-step loan program. The majority of the
properties added to OREO during the fourth quarter of 2009 consisted of 405 lots
within 9 residential site development projects. These lots contributed to the
reduction in the average OREO property book value to $80,000 at December 31,
2009 from $254,000 at September 30, 2009. The projects are primarily located in
Seattle, Maple Valley, Vancouver, Washougal, and Puyallup in the state of
Washington and in Salem, Oregon. The majority of the OREO properties continued
to be acquired through non-judicial foreclosures.




OREO is recorded at the lower of the carrying
amount of the loan or estimated fair value less estimated costs to sell.
Management is responsible for estimating the fair market value of OREO and
utilizes appraisals and internal judgments in its assessment of fair market
value and estimated selling costs. This estimate becomes the property’s book
value at the time it is taken into OREO. If the estimate is below the carrying
value of the related loan, the amount of the required valuation adjustment is
charged to the allowance for loan losses at the time the property is taken into
OREO. Management then periodically reviews OREO to determine whether the
property continues to be carried at the lower of its recorded book value or
estimated fair value, net of estimated costs to sell. Any further OREO valuation
adjustments or subsequent gains or losses upon final disposition of OREO are
charged to other noninterest income.




43




---



Expenses from the acquisition,
maintenance and disposition of OREO properties are included in other noninterest
expense in the statements of income (loss). It will be critical to our operating
results for us to dispose of OREO properties in a timely fashion and at
valuations that are consistent with our expectations. We incurred significant
charges to noninterest income in 2009 due to valuation adjustments and losses
upon final disposition, including $14.5 million in the fourth quarter. Continued
decline in market values in our area would lead to additional valuation
adjustments, which would have an adverse effect on our results of
operation.




The Bank completed 42 short sales in 2009
for total proceeds of $11.5 million. Short sales occur when we accept an
agreement with a loan obligor to sell the Bank's collateral on a loan that
produces net proceeds that is less than what is owed. The obligor receives no
proceeds; however, the debt is fully extinguished. A short sale is an
alternative to foreclosure. The losses on short sales and valuation adjustments
on loans prior to taking property into OREO are recorded directly to the
allowance for loan losses.




The following table presents total OREO
property sales and short sales for the periods shown.




Total OREO property sales
  and(Dollars in thousands)
            
            Total OREO related activity
            
            Total short sales
            
            short salesAmount
            
            Number
            
            Amount
            
            Number
            
            Amount
            
            NumberFull
      year 2008:Beginning balance January 1, 2008
            
            $
            3,255
            
            
            15Additions to OREO
            
            
            87,799
            
            
            336Capitalized
    improvements
            
            
            1,329Valuation adjustments
            
            
            (4,785
            )Disposition of OREO
      properties
            
            
            (17,488
            )
            
            (63
            )
            
            $
            (11,448
            )
            
            (40
            )
            
            $
            (28,936
            )
            
            (103
            )Ending balance Dec. 31, 2008
            
            $
            70,110
            
            
            288Quarterly 2009:Beginning balance January 1, 2009
            
            
            70,110
            
            
            288Additions to OREO
            
            
            25,249
            
            
            79Capitalized
    improvements
            
            
            682Valuation adjustments
            
            
            (4,761
            )Disposition of OREO
      properties
            
            
            (4,091
            )
            
            (18
            )
            
            $
            (3,450
            )
            
            (11
            )
            
            $
            (7,541
            )
            
            (29
            )Ending balance March 31, 2009
            
            $
            87,189
            
            
            349Additions to OREO
            
            
            13,663
            
            
            48Capitalized
    improvements
            
            
            1,156Valuation adjustments
            
            
            (3,064
            )Disposition of OREO
      properties
            
            
            (15,114
            )
            
            (62
            )
            
            $
            (1,686
            )
            
            (5
            )
            
            $
            (16,800
            )
            
            (67
            )Ending balance June 30, 2009
            
            $
            83,830
            
            
            335Additions to OREO
            
            
            11,109
            
            
            36Capitalized
    improvements
            
            
            955Valuation adjustments
            
            
            (3,797
            )Disposition of OREO
      properties
            
            
            (15,527
            )
            
            (70
            )
            
            $
            (3,260
            )
            
            (14
            )
            
            $
            (18,787
            )
            
            (84
            )Ending balance Sept. 30, 2009
            
            $
            76,570
            
            
            301Additions to OREO
            
            
            24,153
            
            
            536Capitalized
    improvements
            
            
            2,140Valuation adjustments
            
            
            (6,940
            )Disposition of OREO
      properties
            
            
            (42,329
            )
            
            (165
            )
            
            $
            (3,107
            )
            
            (12
            )
            
            $
            (45,436
            )
            
            (177
            )Ending balance Dec. 31, 2009
            
            $
            53,594
            
            
            672Full
      year 2009:Beginning balance January 1, 2009
            
            $
            70,110
            
            
            288Additions to OREO
            
            
            74,174
            
            
            699Capitalized
    improvements
            
            
            4,933Valuation adjustments
            
            
            (18,562
            )Disposition of OREO properties
            
            
            (77,061
            )
            
            (315
            )
            
            $
            (11,503
            )
            
            (42
            )
            
            $
            (88,564
            )
            
            (357
            )Ending balance Dec. 31, 2009
            
            $
            53,594
            
            
            672


The combined balance of the 315 OREO
properties sold and loans associated with 42 short sales was $88.6 million in
2009, up from $28.9 million in 2008.




44




---



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 0.49% of
total loans at December 31, 2009, up slightly from 0.39% at December 31, 2008.
We have seen the largest increase in delinquencies in our commercial real estate
portfolio, in which delinquencies have increased from $1.3 million at December
31, 2008 to $4.0 million at December 31, 2009. Delinquencies in commercial and
real estate construction loans each declined.




The following table summarizes total
delinquent loan balances by type of loan for the periods shown:




December 31,(Dollars in thousands)
            
            2009
            
            % of
            
            2008
            
            % of
            
            2007
            
            % ofAmount
            
            category
            
            Amount
            
            category
            
            Amount
            
            categoryCommercial
            
            $
            1,151
            
            
            0.31
            %
            
            $
            2,814
            
            
            0.58
            %
            
            $
            6,086
            
            
            1.21
            %Real estate construction
            
            
            606
            
            
            0.61
            %
            
            
            1,940
            
            
            0.68
            %
            
            
            36,941
            
            
            7.13
            %Real estate mortgage
            
            
            2,649
            
            
            0.71
            %
            
            
            1,934
            
            
            0.49
            %
            
            
            531
            
            
            0.16
            %Commercial real estate
            
            
            3,962
            
            
            0.46
            %
            
            
            1,324
            
            
            0.15
            %
            
            
            792
            
            
            0.10
            %Installment and other consumer
            
            
            59
            
            
            0.32
            %
            
            
            80
            
            
            0.36
            %
            
            
            134
            
            
            0.58
            %Total loans 30-89 days past due,not in nonaccrual
    status
            
            $
            8,427
            
            
            
            
            
            $
            8,092
            
            
            
            
            
            $
            44,484Delinquent loans to total
loans
            
            
            0.49
            %
            
            
            
            
            
            0.39
            %
            
            
            
            
            
            2.05
            %


45




---



Allowance for Credit Losses and Net Loan
Charge-offs




Allowance for Credit Losses. An allowance for credit losses has been
established based on management’s best estimate, as of the balance sheet date,
of probable losses inherent in the loan portfolio. The actual losses may vary
significantly from the estimated amounts. For more information regarding the
Company’s allowance for credit losses, see the discussion under the subheading
“Allowance for Credit Losses” in the section “Critical Accounting Policies”
included in Item 7 of this report. 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 relating to loans in the loan
portfolio, and the reserve for unfunded commitments. Our methodology for
determining the allowance for credit losses consists of several key elements,
which include:


- Specific Allowances.Aspecific
  allowance is established when management has identified unique or particular
  risks that were related to a specific loan that demonstrated risk
  characteristics consistent with impairment. Specific allowances may be
  established when management can estimate the amount of an impairment of a
  loan, typically on a non real estate collateralized loan or to address the
  unique risks associated with a group of loans or particular type of credit
  exposure. The Company does not establish specific allowances on real estate
  collateralized loans as impairment on these loans is charged off to the
  allowance for credit losses when impairment is established.
- Formula Allowance.The formula allowance is calculated by
  applying loss factors to individual loans based on the assignment of risk
  ratings, or through the assignment of loss factors to homogenous pools of
  loans. Changes in risk 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 collectability of the portfolio as of the evaluation
  date.
- Unallocated Allowance.The unallocated loan loss allowance
  represents an amount for imprecision or uncertainty that is inherent in
  estimates used to determine the allowance. In determining whether to carry an
  unallocated allowance and, if so, the amount of the allowance, management
  considers a variety of subjective factors, including regional economic and
  business conditions that impact important segments of our portfolio, loan
  growth rates, the depth and skill of lending staff, the interest rate
  environment, and the results of bank regulatory examinations and findings of
  our internal credit examiners. Currently, we have an unallocated allowance for
  loan losses that is the result of our judgment about risks inherent in the
  loan portfolio due to economic uncertainties, as well as our evaluation of
  historical loss experience relative to current trends, and other subjective
  factors. The current level of unallocated reserves is high by historical
  standards; however, the Company believes higher levels of unallocated reserves
  are appropriate given downward pressure on real estate values and higher
  levels of uncertainty associated with strained economic
  conditions.
- Reserve for Unfunded Commitments.A reserve for unfunded
  commitments is maintained at a level that, in the opinion of management, is
  adequate to absorb probable losses associated with commitments to lend funds
  under existing agreements, for example, the Bank’s commitment to fund advances
  under lines of credit. The reserve amount for unfunded commitments is
  determined based on our methodologies described above with respect to the
  formula allowance. As our unfunded commitments decrease due to the transition
  to a funded loan, the corresponding reserve for unfunded commitments will
  decrease.

At December 31, 2009, the allowance for credit
losses was $39.4 million or 2.29% of total loans, consisting of a $33.4 million
formula allowance, a $5.0 million unallocated allowance and a $1.0 million
reserve for unfunded commitments. At December 31, 2008, the allowance for credit
losses was $29.9 million or 1.45% of total loans, consisting of a $27.0 million
formula allowance, a $1.9 million unallocated allowance and a $1.0 million
reserve for unfunded commitments. There were no specific allowances for impaired
loans at either year end 2009 or 2008. During 2009 our provision for credit
losses exceeded net charge-offs, increasing the allowance for credit losses by
$9.5 million. Contributing factors included negative risk rating migration
within the loan portfolio and the establishment of a reserve allocation for the
home equity line of credit portfolio.




At December 31, 2009, and 2008, Bancorp’s
recorded investment in loans that were considered to be impaired was $98.8
million and $161.9 million, respectively. The average balance of impaired loans
for the years ended December 31, 2009, 2008, and 2007 was $134.3 million, $128.6
million and $15.5 million, respectively.




Overall, we believe that the allowance for
credit losses is adequate to absorb losses in the loan portfolio at December 31,
2009. 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.




46




---



Changes in the total allowance for
credit losses for full years ended December 31, 2009 through December 31, 2005,
are presented in the following table:




December
      31,(Dollars in thousands)
            2009
            
            2008
            
            2007
            
            2006
            
            2005Loans outstanding at end of
    period
            $
            1,724,842
            
            
            $
            2,064,796
            
            
            $
            2,172,669
            
            
            $
            1,947,690
            
            
            $
            1,554,454Average loans outstanding during the period
            $
            1,914,975
            
            
            $
            2,146,870
            
            
            $
            2,094,977
            
            
            $
            1,745,777
            
            
            $
            1,479,933Allowance for credit losses, beginning
      of period
            $
            29,934
            
            
            $
            54,903
            
            
            $
            23,017
            
            
            $
            20,469
            
            
            $
            18,971Allowance for loan losses, from acquisition
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            887
            
            
            
            -Loans charged off:Commercial
            
            (22,411
            )
            
            
            (6,464
            )
            
            
            (3,798
            )
            
            
            (831
            )
            
            
            (634
            )Commercial real estate construction
            
            (325
            )
            
            
            (1,422
            )
            
            
            -
            
            
            
            -
            
            
            
            (1
            )Residential real estate construction
            
            (28,287
            )
            
            
            (10,105
            )
            
            
            -
            
            
            
            -
            
            
            
            -Two-step residential construction
            
            (6,963
            )
            
            
            (42,483
            )
            
            
            (2,540
            )
            
            
            -
            
            
            
            -Total real estate
      construction
            
            (35,575
            )
            
            
            (54,010
            )
            
            
            (2,540
            )
            
            
            -
            
            
            
            (1
            )Mortgage
            
            (10,022
            )
            
            
            (1,811
            )
            
            
            -
            
            
            
            -
            
            
            
            -Nonstandard mortgage
            
            (3,666
            )
            
            
            (3,036
            )
            
            
            -
            
            
            
            -
            
            
            
            -Home equity
            
            (3,394
            )
            
            
            (249
            )
            
            
            (71
            )
            
            
            (48
            )
            
            
            (32
            )Total real estate
      mortgage
            
            (17,082
            )
            
            
            (5,096
            )
            
            
            (71
            )
            
            
            (48
            )
            
            
            (32
            )Commercial real estate
            
            (5,383
            )
            
            
            (826
            )
            
            
            -
            
            
            
            -
            
            
            
            -Installment and
    consumer
            
            (840
            )
            
            
            (531
            )
            
            
            (254
            )
            
            
            (130
            )
            
            
            (507
            )Overdraft
            
            (1,054
            )
            
            
            (1,328
            )
            
            
            (1,050
            )
            
            
            (912
            )
            
            
            (450
            )Total loans charged
    off
            
            (82,345
            )
            
            
            (68,255
            )
            
            
            (7,713
            )
            
            
            (1,921
            )
            
            
            (1,624
            )Recoveries:Commercial
            
            1,005
            
            
            
            203
            
            
            
            269
            
            
            
            501
            
            
            
            478Commercial real estate construction
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Residential real estate construction
            
            44
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Two-step residential construction
            
            241
            
            
            
            2,339
            
            
            
            7
            
            
            
            -
            
            
            
            -Total real estate
      construction
            
            285
            
            
            
            2,339
            
            
            
            7
            
            
            
            -
            
            
            
            -Mortgage
            
            11
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            41Nonstandard mortgage
            
            1
            
            
            
            38
            
            
            
            -
            
            
            
            -
            
            
            
            -Home equity
            
            35
            
            
            
            32
            
            
            
            33
            
            
            
            36
            
            
            
            46Total real
      estate mortgage
            
            47
            
            
            
            70
            
            
            
            33
            
            
            
            36
            
            
            
            87Commercial real estate
            
            151
            
            
            
            -
            
            
            
            2
            
            
            
            4
            
            
            
            21Installment and
    consumer
            
            65
            
            
            
            78
            
            
            
            112
            
            
            
            75
            
            
            
            279Overdraft
            
            219
            
            
            
            229
            
            
            
            220
            
            
            
            233
            
            
            
            82Total recoveries
            
            1,772
            
            
            
            2,919
            
            
            
            643
            
            
            
            849
            
            
            
            947Net loans charged off
            
            (80,573
            )
            
            
            (65,336
            )
            
            
            (7,070
            )
            
            
            (1,072
            )
            
            
            (677
            )Provision for credit losses
      loans other than two-step loans
            
            83,756
            
            
            
            30,867
            
            
            
            7,976
            
            
            
            2,733
            
            
            
            2,175Provision for credit losses two-step loans
            
            6,301
            
            
            
            9,500
            
            
            
            30,980
            
            
            
            -
            
            
            
            -Total provision for credit losses
            
            90,057
            
            
            
            40,367
            
            
            
            38,956
            
            
            
            2,733
            
            
            
            2,175Allowance for credit losses, end of
      period
            $
            39,418
            
            
            $
            29,934
            
            
            $
            54,903
            
            
            $
            23,017
            
            
            $
            20,469Components of allowance for credit
      lossesAllowance for loan
      losses
            $
            38,490
            
            
            $
            28,920
            
            
            $
            46,917
            
            
            $
            23,017
            
            
            $
            20,469Reserve for unfunded commitments
            
            928
            
            
            
            1,014
            
            
            
            7,986
            
            
            
            -
            
            
            
            -Total allowance for credit losses
            $
            39,418
            
            
            $
            29,934
            
            
            $
            54,903
            
            
            $
            23,017
            
            
            $
            20,469Ratio of net loans charged off to
      averageloans outstanding
            
            4.21
            %
            
            
            3.04
            %
            
            
            0.34
            %
            
            
            0.06
            %
            
            
            0.05
            %Ratio of allowance for loan losses to end ofperiod loans
            
            2.23
            %
            
            
            1.40
            %
            
            
            2.16
            %
            
            
            1.18
            %
            
            
            1.32
            %Ratio of allowance for credit losses to
      end ofperiod loans
            
            2.29
            %
            
            
            1.45
            %
            
            
            2.53
            %
            
            
            1.18
            %
            
            
            1.32
            %


At December 31, 2009, our allowance for loan
losses was $38.5 million, or 2.23% of total loans, compared to $28.9 million or
1.40% of total loans at December 31, 2008.




47




---



Net Loan Charge-offs. During 2009, total net loan charge-offs were $80.6 million compared to
$65.3 million in 2008. Net loan charge-offs in 2007 were $7.1 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 4.21% for the year
ended 2009, up from 3.04% in 2008 and .34% in 2007. The total net loan
charge-off percentage increased significantly in 2009 with loan losses primarily
concentrated within the commercial, residential real estate construction loans
outside the two-step loan program, and the mortgage portfolios partly offset by
a reduction in net charge-offs associated with two-step residential construction
loans.




Deposits and Borrowings




We predominantly use customer
deposits and FHLB borrowings to fund earning assets. The composition of our
funding mix has and will continue to depend on our funding needs, customer
demand for deposit products (which may be influenced by the availability of FDIC
insurance), interest rate risk position, funding costs of the various
alternatives, the level and shape of the yield curve, collateral requirements
for some borrowings, the relative cost and availability of other funding sources
including government lending or investment programs, and on credit market
conditions. Borrowings may be used to manage short-term and long-term funding
needs when they are less expensive than deposits, or when necessary to adjust
our interest rate risk position.




The following table summarizes the average
amount of, and the average rate paid on, each of the deposit and borrowing
categories for the periods shown:




2009
            
            2008
            
            2007Percent
            
            Rate
            
            
            
            
            Percent
            
            Rate
            
            
            
            
            Percent
            
            Rate(Dollars in thousands)
            Average
      Balance
            
            of
      total
            
            Paid
            
            Average
      Balance
            
            of
      total
            
            Paid
            
            Average
      Balance
            
            of
      total
            
            PaidDemand deposits
            $
            499,283
            
            23.9
            %
            
            -
            
            
            $
            470,601
            
            23.0
            %
            
            -
            
            
            $
            479,310
            
            23.3
            %
            
            -Interest bearing demand
            
            298,002
            
            14.2
            %
            
            0.26
            %
            
            
            279,227
            
            13.6
            %
            
            0.70
            %
            
            
            278,734
            
            13.6
            %
            
            1.23
            %Savings
            
            89,903
            
            4.3
            %
            
            0.79
            %
            
            
            71,542
            
            3.5
            %
            
            0.81
            %
            
            
            72,787
            
            3.6
            %
            
            0.78
            %Money market
            
            617,881
            
            29.5
            %
            
            1.33
            %
            
            
            658,360
            
            32.2
            %
            
            2.22
            %
            
            
            665,037
            
            32.5
            %
            
            3.75
            %Time deposits
            
            587,299
            
            28.1
            %
            
            2.51
            %
            
            
            566,195
            
            27.7
            %
            
            3.60
            %
            
            
            554,263
            
            27.0
            %
            
            4.70
            %Total deposits
            
            2,092,368
            
            100
            %
            
            1.17
            %
            
            
            2,045,925
            
            100
            %
            
            1.84
            %
            
            
            2,050,131
            
            100
            %
            
            2.68
            %Short-term borrowings
            
            44,220
            
            
            
            
            1.82
            %
            
            
            149,016
            
            
            
            
            2.89
            %
            
            
            136,731
            
            
            
            
            5.16
            %Long-term borrowings 1
            
            259,865
            
            
            
            
            3.15
            %
            
            
            151,743
            
            
            
            
            4.50
            %
            
            
            113,748
            
            
            
            
            5.61
            %Total borrowings
            
            304,085
            
            
            
            
            2.95
            %
            
            
            300,759
            
            
            
            
            3.71
            %
            
            
            250,479
            
            
            
            
            5.36
            %Total deposits and borrowings
            $
            2,396,453
            
            
            
            
            1.76
            %
            
            $
            2,346,684
            
            
            
            
            2.60
            %
            
            $
            2,300,610
            
            
            
            
            3.76
            %


1
            
            Long-term borrowings include junior
      subordinated debentures.




Average total deposits in 2009 increased 2.3%
or $46.4 million from 2008. Our deposit mix shifted slightly towards demand and
savings categories from 2008. Average money market deposits declined in 2009,
which we believe was caused in part by the historically low market interest
rates. Average noninterest bearing demand category represented 23.9% of total
deposits, up slightly from the prior year. The 2009 average rate paid on
deposits declined .67% from 2008 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. Our marketing efforts are primarily focused on long-term growth in
business and consumer relationships with deposit accounts and balances in lower
cost categories such as demand deposits, interest bearing demand, savings and
money market accounts. Whether we will be successful maintaining and growing our
low cost deposit base will depend on various factors, including deposit pricing,
client behavior, the effects of the expected expiration of the TAG Program on
June 30, 2010, and our success in competing for deposits in uncertain economic
and market conditions.




The time deposits category includes
certificates of deposit originated at our branches, deposits obtained from
internet listing services, and brokered deposits, which include both wholesale
brokered deposits and deposits arising out of the Company’s participation in the
Certificate of Deposit Account Registry Service (“CDARS”) network that are
treated as brokered deposits for regulatory purposes. The CDARS network uses a
deposit matching program to match CDARS deposits in other participating banks,
dollar for dollar, enabling participating institutions to make additional FDIC
coverage available to customers. The CDARS program accommodates both
"reciprocal" and "one-way" deposits. A reciprocal CDARS deposit is an exchange
of a like deposit amount between institutions (which amount is recorded on the
balance sheet of the participating institutions) and a one-way CDARS deposit is
a deposit that is either acquired or sold by the participating institutions. An
acquired one-way deposit is then recorded on the balance sheet of the acquiring
institution and removed from that of the seller.




48




---



At December 31, 2009, brokered deposits
totaled $72.4 million or 3% of period end deposits, of which $19.8 million were
reciprocal CDARS deposits and $52.6 million were wholesale brokered deposits
compared to $71.0 million in total brokered deposits at December 31, 2008, all
of which were CDARS deposits. CDARS deposits declined $51.2 million during 2009.
Under the Consent Order, the Bank may not accept, renew, or rollover brokered
deposits without regulatory approval and is subject to limitations on the rates
it can pay on deposits. The Bank believes that the adverse effect of the
expiration of the TAG Program on its deposit balances will be more severe if it
is unable to offer the CDARS program to customers. Time deposits obtained via
internet listing services totaled $37.0 million at December 31, 2009. As of
December 31, 2009, 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
      DepositsAmount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            PercentReprice/mature in 3 months or
    less
            $
            41,775
            
            19.8
            %
            
            $
            41,076
            
            13.1
            %
            
            $
            82,851
            
            15.8
            %Reprice/mature after 3 months through 6 months
            
            74,697
            
            35.4
            %
            
            
            93,357
            
            29.8
            %
            
            
            168,054
            
            32.0
            %Reprice/mature after 6 months through
      one year
            
            48,367
            
            22.9
            %
            
            
            84,832
            
            27.1
            %
            
            
            133,199
            
            25.4
            %Reprice/mature after one year through five years
            
            46,234
            
            21.9
            %
            
            
            94,187
            
            30.0
            %
            
            
            140,421
            
            26.8
            %Reprice/mature after five
years
            
            -
            
            0.0
            %
            
            
            -
            
            0.0
            %
            
            
            -
            
            0.0
            %Total
            $
            211,073
            
            100.0
            %
            
            $
            313,452
            
            100.0
            %
            
            $
            524,525
            
            100.0
            %


Approximately 73% of our time
deposits will mature and reprice in the next 12 months. 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
the FHLB.




December 31,
            
            December 31,(Dollars in thousands)
            2009
            
            2008Time deposits less than
    $100,000
            $
            313,452
            
            60
            %
            
            $
            294,285
            
            50
            %Time deposits $100,000 to $250,000
            
            162,886
            
            31
            %
            
            
            130,107
            
            22
            %Time deposits greater than
      $250,000
            
            48,187
            
            9
            %
            
            
            159,901
            
            28
            %Total Time Deposits
            $
            524,525
            
            100
            %
            
            $
            584,293
            
            100
            %


As shown above, time deposits of $100,000 or
more represented about 40% of total time deposits at year end 2009, down from
50% at December 31, 2008. This was caused primarily by the significant reduction
in time deposits greater than $250,000 as we reduced the amount of uninsured
public time deposits due to increased pledging requirements for such deposits.
Time deposits less than $250,000 increased during 2009 due to FDIC coverage in
the $100,000 to $250,000 segment during the full year, and the addition of
wholesale brokered deposits and deposits from internet listing services within
this category.




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, the
expiration of the TAG Program, 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 wholesale brokered deposits and CDARS
deposits in the future if management determines that is appropriate to maintain
or grow our deposit funding base in such manner and if allowed by our regulators
under the terms of the Consent Order.




As of December 31, 2009, 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 aftermonths or
      less
            
            through one
      year
            
            through five
      years
            
            five
      years
            
            TotalShort-term borrowings
            $
            -
            
            $
            12,600
            
            $
            -
            
            $
            -
            
            $
            12,600Long-term borrowings 1
            
            -
            
            
            -
            
            
            250,699
            
            
            -
            
            
            250,699Total borrowings
            $
            -
            
            $
            12,600
            
            $
            250,699
            
            $
            -
            
            $
            263,299


1
            
            Based on contractual maturities; actual
      terms may vary based on call dates.




49




---



Average total borrowings in 2009 remained
substantially unchanged from 2008 but we extended the maturities of our FHLB
borrowings during 2009 to reduce the interest rate sensitivity on such
borrowings. Our combined deposit and borrowing cost decreased .84% from 2008,
primarily reflecting the decline in short-term market interest rates from prior
periods.




At December 31, 2009, six wholly-owned
subsidiary grantor trusts established by Bancorp had issued and sold $51.0
million of trust preferred securities that remain outstanding. Trust preferred
securities accrue and pay distributions periodically at specified annual rates
as provided in each indenture. The trusts used all of the net proceeds from each
sale of trust preferred securities to purchase a like amount of junior
subordinated debentures (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, 2009:




(Dollars in thousands)Preferred security
            
            Rate type
            
            
            
            
            Rate at
            
            
            
            Next possibleIssuance
    Trust
            
            Issuance
date
            
            amount
            
            1
            
            Initial
      rate
            
            12/31/09
            
            Maturity
date
            
            redemption date 2West Coast Statutory Trust III
            
            September 2003
            
            $
            7,500
            
            Variable
            
            6.75
            %
            
            3.20
            %
            
            September 2033
            
            Currently redeemableWest Coast Statutory Trust IV
            
            March 2004
            
            $
            6,000
            
            Variable
            
            5.88
            %
            
            3.04
            %
            
            March 2034
            
            Currently redeemableWest Coast Statutory Trust V
            
            April 2006
            
            $
            15,000
            
            Variable
            
            6.79
            %
            
            1.68
            %
            
            June 2036
            
            June 2011West Coast Statutory Trust VI
            
            December 2006
            
            $
            5,000
            
            Variable
            
            7.04
            %
            
            1.93
            %
            
            December 2036
            
            December 2011West Coast Statutory Trust VII
            
            March 2007
            
            $
            12,500
            
            Variable
            
            6.90
            %
            
            1.80
            %
            
            March 2037
            
            March 2012West Coast Statutory Trust VIII
            
            June 2007
            
            $
            5,000
            
            Variable
            
            6.74
            %
            
            1.63
            %
            
            June 2037
            
            June 2012Total
            
            $
            51,000
            
            
            
            Weighted rate
            
            2.12
            %


1
            
            The variable rate preferred securities
      reprice quarterly.2
            
            Securities are redeemable at the option of Bancorp following these
      dates.




The interest rates on all issued
trust preferred securities reset quarterly and are tied to the London Interbank
Offered Rate (“LIBOR”) rate. There were no purchases, redemptions or maturities
of trust preferred securities in 2009. However, during 2009, the Company
exercised its right to defer regularly scheduled interest payments on
outstanding junior subordinated debentures related to its trust preferred
securities. The Company continues to accrue interest expense on these junior
subordinated debentures and may not pay dividends on its capital stock until all
accrued but unpaid interest has been paid in full. The average balance of junior
subordinated debentures in 2009 was $51.0 million, unchanged from
2008.




50




---



Capital Resources




The Federal Reserve and the FDIC
have established minimum requirements for capital adequacy for bank holding
companies and state non-member banks. For more information on this topic, see
the discussion under the subheading “Capital Adequacy Requirements” in the
section “Supervision and Regulation” included in Item 1 of this report. The
following table summarizes the capital measures of Bancorp and the Bank at
December 31, 2009:




Bank-levelWest Coast Bancorp
            
            West Coast Bank
            
            Guideline
      requirementsDecember
      31,
            
            December
      31,
            
            Adequately
            
            Well2009
            
            2008
            
            2009
            
            2008
            
            Capitalized
            
            CapitalizedTier 1 risk-based capital
ratio
            7.17
            %
            
            9.96
            %
            
            14.11
            %
            
            9.66
            %
            
            4.00
            %
            
            6.00
            %Total risk-based capital ratio
            9.13
            %
            
            11.21
            %
            
            15.37
            %
            
            10.91
            %
            
            8.00
            %
            
            10.00
            %Leverage ratio
            5.37
            %
            
            9.46
            %
            
            10.57
            %
            
            9.17
            %
            
            4.00
            %
            
            5.00
            %


The Bank’s year end 2009 regulatory
capital ratios improved significantly from December 31, 2008 as a result of
Bancorp’s $134.2 million capital contribution to the Bank following the October
2009 private capital raise. The total capital ratio at the Bank improved to
15.37% at December 31, 2009, from 10.91% at December 31, 2008, while the Bank’s
Tier 1 capital ratio increased from 9.66% to 14.11% over the same period. As of
December 31, 2009, the Bank met the capital level requirements of well
capitalized banks, which include a minimum total risk-based capital ratio of
10%, a minimum Tier 1 risk-based capital ratio of 6%, and a minimum leverage
ratio of 5%. However, the Bank is not "well capitalized" for many regulatory
purposes as long as the Consent Order is in effect.




The Consent Order requires that no later than
December 31, 2009, and during the life of the Consent Order, the Bank shall
maintain: (a) a Tier 1 capital to total assets leverage ratio (“Leverage ratio”)
at least equal to or greater than 10%; and (b) a ratio of qualifying total
capital to risk-weighted assets (“Total risk-based capital ratio”) at least
equal to or greater than 12%. As of December 31, 2009, the Bank satisfied both
of the capital measures required under the Consent Order. For more information
on this topic, see the discussion under the subheading “Current Enforcement
Actions” in the section “Supervision and Regulation” included in Item 1 of this
report.




Bancorp’s stockholders’ equity was $249.1
million at December 31, 2009, up from $198.2 million at December 31, 2008. The
increase in shareholders’ equity during 2009 was due to the fact that amounts
raised in the October private capital raise exceeded the operating losses during
2009.




At December 31, 2009, Bancorp did not meet
both capital level requirements of a well capitalized bank holding company,
which include on a consolidated basis a minimum total risk-based capital ratio
of 10% and a minimum Tier 1 risk-based capital ratio of 6%. Bancorp exceeded the
Federal Reserve's applicable minimum leverage ratio of Tier 1 capital to total
assets of at least 4%.




51




---



The January 20, 2010 shareholder votes in
favor of proposals to increase the number of authorized common shares and
approve the conversion of preferred shares issued in the October 2009 capital
raise to common shares will result in significant improvements to Bancorp’s
regulatory capital ratios as the capital raised by Bancorp will now qualify as
Tier 1 capital at the holding company level for regulatory purposes. As shown in
the table below, at December 31, 2009, on a proforma basis, Bancorp met the
capital level requirements of a well capitalized bank holding company. However,
even on a proforma basis, Bancorp is not "well capitalized" for many regulatory
purposes as long as the Written Agreement is in effect.




The following table shows Bancorp’s actual and
proforma year end capital ratios and book value per common share as of December
31, 2009. Proforma information is presented as if shareholder approvals had been
attained as of that date:




Actual
            
            ProformaWest Coast Bancorp
            
            West Coast BancorpDecember 31,
      2009
            
            December 31,
      2009 1
            
            Increase
      (decrease)Tier 1 risk-based capital
ratio
            
            7.17
            %
            
            
            14.68
            %
            
            
            7.51Total risk-based capital ratio
            
            9.13
            %
            
            
            15.93
            %
            
            
            6.80Leverage ratio
            
            5.37
            %
            
            
            10.97
            %
            
            
            5.60Book value per common share 2
            $
            7.02
            
            
            $
            2.62
            
            
            -$
            4.40


1
            
            Proforma risk-based capital ratios for
      West Coast Bancorp are reported as if shareholder approvals had been
      obtained as of December 31, 2009 and outstanding shares of the Series A
      Preferred Stock had been converted into common stock as of that date.
      Following the approvals and conversion, the Series B Preferred Stock that
      remains outstanding will also qualify as Tier 1 capital and amounts
      invested in the Series B Preferred Shares are therefore included in the
      proforma figures.2
            
            Proforma book value per common share has
      been reported as if shareholder approvals had been obtained as of December
      31, 2009, and the Series A Preferred Stock had been converted into 71.4
      million shares of Common Stock. Proforma book value per share does not
      include shares of Common Stock issuable upon conversion of the Series B
      Preferred stock that is not converted
immediately.


The total risk based capital ratios
of Bancorp include $51 million of junior subordinated debentures of which $27
million qualified as Tier 1 capital at December 31, 2009, under guidance issued
by the Board of Governors of the Federal Reserve System. Bancorp expects to
continue to rely on common equity and junior subordinated debentures to remain
well capitalized, although it does not expect to issue additional junior
subordinated debentures in the near term due to current market
conditions.




The Company closely monitors and manages its
capital position. During 2009, the Company suspended its quarterly cash dividend
which, under the Consent Order and Written Agreement, cannot be reinstated
without regulatory consent. In addition, the Company exercised its right to
defer payment of interest on its outstanding debentures issued in connection
with its trust preferred securities. As a result, the Company did not pay
dividends or make payments on its trust preferred debentures in the third and
fourth quarters of 2009. The Company took other significant steps to preserve
capital and reduce risk based assets throughout 2009, such as slowing new loan
originations and reducing existing commitments selectively. Most significantly,
the Company completed the private capital raise in October 2009, with net
proceeds to the Company of $139.2 million. From the net amounts raised, $5.0
million was retained by Bancorp and $134.2 million was contributed to the Bank
as a capital contribution.




In addition, subsequent to year-end, Bancorp
conducted a rights offering to common shareholders of up to 5.0 million shares
of Common Stock at a price of $2.00 per share. The rights offering expired on
March 1, 2010, and was oversubscribed. As a result, the Company expects to raise
$10.0 million in gross proceeds in the rights offering and issue 5.0 million
shares of Common Stock. For additional information regarding the rights
offering, see Note 26 “Subsequent Events” to the Company’s audited consolidated
financial statements included under the section “Financial Statements and
Supplementary Data” in Item 8 of this report.




Capital raised in the October 2009 private
capital raise and in the March 2010 rights offering significantly improved the
Company's capital position. Nonetheless, the Company will continue to closely
monitor its capital levels and may continue to preserve capital by limiting new
loan commitments, participating out additional loans, monitoring its levels of
risk weighted assets and taking other steps. 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 the Company's service areas, regulatory
considerations, the level of consumer confidence in the Bank and the banking
sector generally, and the Company’s ability to manage and limit the adverse
effects of losses on existing loans, including within its commercial real estate
portfolio.




Bancorp may take steps to raise additional
capital in the future. To do so, Bancorp may offer and issue equity, hybrid
equity or debt instruments, including convertible preferred stock or
subordinated debt. Any equity or debt financing, if available at all, may be
dilutive to existing shareholders or include covenants or other restrictions
that limit the Company’s activities.




52




---



Liquidity and Sources of Funds




The Bank’s primary sources of funds include
customer deposits, advances from the FHLB, maturities of investment securities,
sales of “Available for Sale” securities, loan and OREO sales, loan repayments,
net income, if any, 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, while deposit inflows, loan and OREO sales and
unscheduled loan prepayments are not. Deposit inflows, loan and OREO sales and
unscheduled loan prepayments are influenced by general interest rate levels,
interest rates available on other investments, competition, market and general
economic factors. In addition, changes in government programs, such as the
expected discontinuance of the FDIC’s TAG Program in June 2010, may also
influence deposit behaviors.




Deposits are the primary source of new funds.
Total deposits were $2.1 billion at December 31, 2009, up from $2.0 billion at
December 31, 2008. Over the past 12 months our loan to deposit ratio declined
from 102% to 80% at December 31, 2009. This was a result of loans declining $340
million and deposits increasing $123 million. Lower loan balances combined with
higher deposit balances and borrowings allowed us to increase our investment
securities portfolio and interest bearing cash balances. The Bank increased
liquid assets primarily in an effort to enhance its balance sheet liquidity
position in the uncertain economic environment, as well as to satisfy increasing
pledging requirements and the shared liability structure for uninsured public
funds in Oregon and Washington.




The Consent Order requires that the Bank
maintain a primary liquidity ratio in excess of 15% and net non-core funding
dependency ratio below 25%. At December 31, 2009, these two ratios measured 38%
and 10% respectively, illustrating that we presently have a substantial
liquidity cushion. The primary liquidity ratio is equal to the sum of net cash,
short-term and marketable assets divided by the sum of net deposits and
short-term liabilities. The net non-core funding dependency ratio is non-core
liabilities less short-term investments divided by long-term
assets.




At December 31, 2009, the Bank had outstanding
borrowings of $263 million against its $478 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 a Federal Funds line of credit agreement with a correspondent
financial institution of $5 million at December 31, 2009. The use of such
Federal Funds line is subject to certain conditions. Additionally, at December
31, 2009, the Bank had an available discount window credit line with the Federal
Reserve of approximately $40 million with no balance outstanding. As with the
other lines, each advance under the credit arrangement with the Federal Reserve
is subject to prior Federal Reserve consent. For more information regarding the
Company’s outstanding borrowings, see Note 9 “Borrowings” to the Company’s
audited consolidated financial statements included under the section “Financial
Statements and Supplementary Data” in Item 8 of this report.




The holding company is a separate entity from
the Bank and must provide for its own liquidity. Substantially all of the
holding company’s liquidity, which is required to pay interest on Bancorp’s
junior subordinated debentures, any shareholder cash dividends and other
expenses, comes from dividends declared and paid by the Bank. In addition, the
holding company may receive cash from the exercise of options and the issuance
of equity securities. The holding company retained $5.0 million from the $139.2
million net proceeds in the private capital raise. The remaining $134.2 million
was contributed to the Bank. Under the Consent Order, the Bank may not pay
dividends to the holding company without prior regulatory approval. At December
31, 2009, the holding company did not have any borrowing arrangements of its
own.




Management expects to continue relying on
customer deposits, cash flow from investment securities, and sales of “Available
for Sale” securities, as its most important sources of liquidity. In addition,
the Bank may obtain additional liquidity from loan and OREO sales, loan
repayments, internet deposit listing services, net income, federal funds
markets, the Federal Reserve discount window and other borrowings. Although
deposit balances at times have shown historical growth, such balances may be
influenced by changes in the financial services industry, regulatory changes,
including in 2010 the effects of the expiration of unlimited deposit insurance
on certain accounts under the TAG Program, 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.
The sources of such funds may include, but are not limited to, Federal Funds
purchased, reverse repurchase agreements and borrowings from the FHLB.




For more information on this topic,
see the discussion under the section “Risk Factors” included in Item 1A of this
report.




53




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Off Balance Sheet Arrangements




At December 31, 2009, the Bank had commitments
to extend credit of $564 million, which was down 21% compared to $710 million at
December 31, 2008. For additional information regarding off balance sheet
arrangements and future financial commitments, see Note 21 “Financial
Instruments with Off Balance Sheet Risk” to the Company’s audited consolidated
financial statements included under the section “Financial Statements and
Supplementary Data” in Item 8 of this report. We are party to many contractual
financial obligations, including repayment of borrowings, operating lease
payments and commitments to extend credit.




The table below presents certain future
financial obligations including payments required under retirement plans which
are included in “Other long-term liabilities” below:




Payments
      due within time period at December 31, 2009(Dollars in thousands)
            
            
            
            
            
            
            
            
            
            Due After Five0-12
      Months
            
            1-3
      Years
            
            4-5
      Years
            
            Years
            
            TotalOperating leases 1
            $
            3,936
            
            $
            7,628
            
            $
            6,649
            
            $
            7,958
            
            $
            26,171Junior subordinated debentures 2 3
            
            1,731
            
            
            2,158
            
            
            2,158
            
            
            73,385
            
            
            79,432Long-term borrowings 3
            
            7,530
            
            
            147,776
            
            
            116,695
            
            
            -
            
            
            272,001Other long-term liabilities
            
            185
            
            
            341
            
            
            334
            
            
            835
            
            
            1,695Total
            $
            13,382
            
            $
            157,903
            
            $
            125,836
            
            $
            82,178
            
            $
            379,299


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, 2009
      contractual interest rates.


Critical Accounting Policies




We have identified our accounting policies
related to our calculation of the allowance for credit losses, valuation of
other real estate owned (“OREO”), and estimates relating to income taxes as
policies that are most critical to an understanding of our financial condition
and operating results. Application of these policies and calculation of these
amounts involve difficult, subjective, and complex judgments, and often involve
estimates about matters that are inherently uncertain. These policies are
discussed in greater detail below, as well as in Note 1 “Summary of Significant
Accounting Policies” to the Company’s audited consolidated financial statements
included under the section “Financial Statements and Supplementary Data” Item 8
of this report.




Allowance for Credit Losses. Our methodology for establishing the allowance
for credit losses 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 management’s evaluation of 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 management’s evaluation of particular loan structures, the
size and complexity of individual loans, the lending officer’s background and
experience levels, the extent and nature of waivers of existing loan policies,
and the pace of loan growth within particular loan portfolios. New products and
expansion into new geographic regions can increase the uncertainties in
management’s evaluation of the factors that are part of establishment of an
allowance for credit losses that is believed to be adequate. Changes in any of
the above factors could have a significant effect on the calculation of the
allowance for credit losses in any given period. This discussion should be read
in conjunction with our audited consolidated financial statements and related
notes included in Item 8 of this report, and the section “Allowance for Credit
Losses and Net Loan Charge-offs” in this Item 7 of this report.




Valuation of OREO. The Bank takes possession of OREO as part of its lending business, as
real estate serves as collateral for many of the Bank’s loans. OREO is initially
recorded in our financial statements at the lower of the carrying amount of the
loan or fair value of the property less the estimated costs to sell the
property. Management considers third party appraisals as well as independent
fair market value assessments from realtors or persons involved in selling OREO
in determining the fair value of particular properties. Accordingly, the
valuation of OREO is subject to significant external and internal judgment. If
there is a difference between management’s assessment of fair value less
estimated cost to sell and the carrying value of the loan at the date a
particular property is transferred into OREO, the difference is charged to the
allowance for credit losses. Thereafter, management periodically assesses its
estimate of fair value, often by means of new appraisals. Any resulting
decreases in the estimated fair value of OREO are considered valuation
adjustments and trigger a corresponding charge to the line item “Other real
estate owned sales and valuation adjustments and (loss) gain on sales” within
total noninterest income of the consolidated statements of income (loss). At
December 31, 2009, the Bank had $53.6 million of OREO.




54




---



Income taxes. We
are subject to the income tax laws of the United States and primarily the state
of Oregon. We account for income taxes using the asset and liability method in
accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 740, “Income Taxes.” Our income tax benefit or
expense is estimated and reported in the Consolidated Statements of Income
(Loss) and includes both current and deferred tax expense or benefits and
reflects taxes to be paid or refunded for the current period. Current taxes
receivable represent the Company’s expected federal refund and are reported in
other assets on the Consolidated Balance Sheets.




We determine our deferred income taxes using
the balance sheet method, under which the net deferred tax asset or liability is
based on the tax effects of the differences between the book and tax bases of
assets and liabilities, and changes in tax rates and laws are recognized in the
period in which they occur. Deferred income tax expense or benefit is recorded
based on changes in deferred tax assets and liabilities between periods. The
Company records net deferred tax assets to the extent these assets will more
likely than not be realized. In making the determination whether a deferred tax
asset is more likely than not to be realized, management seeks to evaluate all
available positive and negative evidence including the possibility of future
reversals of existing taxable temporary differences, projected future taxable
income, tax planning strategies and recent financial results. A deferred tax
asset valuation allowance is established to reduce the net carrying amount of
deferred tax assets if it is determined to be more likely than not that all or
some portion of the deferred tax asset will not be realized. Based on its
evaluation of the Company’s deferred tax assets as of December 31, 2009,
management determined that it was appropriate to record a deferred tax asset
valuation allowance of $21.0 million in the fourth quarter to reduce the
deferred tax asset to reflect only that portion that more likely than not will
be realized. This amount was determined to be $3.2 million as of that
date.




In reaching the determination to record the
deferred tax asset valuation allowance, management evaluated all available
evidence but felt that a significant piece of objective evidence was the
Company’s cumulative loss over the three year period ended December 31, 2009.
This objective evidence limited management's ability to consider other
subjective evidence, including any subjective expectation of a return to
profitability in the future. Going forward, management will review the deferred
tax asset on a quarterly basis. In the event management later determines that
the Company is more likely than not to be able to realize the tax benefits of
its cumulative losses in recent years, all or part of the deferred tax asset
valuation allowance may be reversed.




The income tax laws of the jurisdictions in
which we operate are complex and subject to different interpretations. In
establishing a provision for income tax expense or benefit, we make judgments
and interpretations about the application of these complex tax laws. Our
interpretations are subject to change and may be subject to external review
during examination by taxing authorities. Disputes may arise over our tax
positions. See Note 17 “Income Taxes” to the Company’s audited consolidated
financial statements included under the section “Financial Statements and
Supplementary Data” in Item 8 of this report.




55




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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.




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 independent economic service, are compared to a stable (unchanged
from December 31, 2009) rate scenario:




Actual
      rates
            Base
    Case
            Falling
      Rates
            Rising
      RatesDecember 31,
      2009
            2010
      (average)
            2010
      (average)
            2010
      (average)Federal Funds
      Rate
            0 -
    .25%
            .24%
            .01%
            1.45%Prime
      Rate
            3.25%
            3.33%
            3.11%
            4.67%Treasury Yield
      Curve Spread 10-year to 3 month
            379 basis
      points
            216 basis
      points
            292 basis
      points
            334 basis
      pointsGlobal Insight
      Probability
            
            60%
            30%
            10%Stable rate scenario compared to:
            Percent Change
      inNet Interest
      IncomeGlobal Insight Rising
            +1.3%Global Insight Base Case
            +.6%Global Insight Falling
            -.5%


As illustrated in the above table, we estimate
our balance sheet was slightly asset sensitive over a 12 month horizon at
December 31, 2009, meaning that interest earning assets are expected to mature
or reprice more quickly than interest-bearing liabilities in a given period. A
decrease in market rates of interest could adversely affect net interest income,
while an increase in market rates may increase net interest income slightly. At
December 31, 2008, we estimated that our balance sheet was relatively neutral.
The increase in cash balances and long-term debt during 2009 increased 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, 2009. 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, 2009
            Percent Change
      inChange in Interest Rates
            Present Value
      of EquityUp
      200 basis points
            5.5%Up
      100 basis points
            2.8%Down
      100 basis points
            -1.2%


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 slightly
asset sensitive.




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
transaction activity will also have an impact on the asset/liability position as
new assets are acquired and added.




56




---



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, 2009.
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, 2009(Dollars in thousands)
            
            
            
            
            
            
            
            
            
            
            Due After0-3
      Months
            
            4-12
      Months
            
            1-5
      Years
            
            Five
      Years
            
            TotalInterest Earning Assets:Interest earning balances due
      from banks
            $
            234,830
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            234,830Federal funds sold
            
            20,559
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            20,559Trading assets
            
            731
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            731Investments available for sale1 2
            
            16,178
            
            
            
            68,635
            
            
            
            307,157
            
            
            
            170,307
            
            
            
            562,277Federal Home Loan Bank Stock,
      held at cost 1
            
            12,148
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,148Loans held for sale
            
            1,176
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,176Loans, including
fees
            
            708,349
            
            
            
            258,726
            
            
            
            707,024
            
            
            
            50,743
            
            
            
            1,724,842Total interest earning assets
            $
            993,971
            
            
            $
            327,361
            
            
            $
            1,014,181
            
            
            $
            221,050
            
            
            
            2,556,563Allowance for loan
      losses
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (38,490
            )Cash and due from banks
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            47,708Other assets
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            167,766Total assets
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,733,547Interest Bearing Liabilities:Savings, interest bearing
      demandand money markets 3
            $
            59,929
            
            
            $
            141,613
            
            
            $
            423,453
            
            
            $
            455,149
            
            
            $
            1,080,144Time deposits
            
            82,844
            
            
            
            301,230
            
            
            
            140,451
            
            
            
            -
            
            
            
            524,525Borrowings 2
            
            -
            
            
            
            12,600
            
            
            
            250,699
            
            
            
            -
            
            
            
            263,299Junior subordinated debentures
            
            51,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            51,000Total interest bearing liabilities
            $
            193,773
            
            
            $
            455,443
            
            
            $
            814,603
            
            
            $
            455,149
            
            
            
            1,918,968Other liabilities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            565,521Total liabilities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,484,489Stockholders' equity
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            249,058Total liabilities & stockholders' equity
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,733,547Interest sensitivity gap
            $
            800,198
            
            
            $
            (128,082
            )
            
            $
            199,578
            
            
            $
            (234,099
            )
            
            $
            637,595Cumulative interest
      sensitivity gap
            $
            800,198
            
            
            $
            672,116
            
            
            $
            871,694
            
            
            $
            637,595Cumulative interest sensitivity gapas a percentage of total assets
            
            29
            %
            
            
            25
            %
            
            
            32
            %
            
            
            23
            %


1
            
            Equity investments have been placed in
      the 0-3 month category.2
            
            Repricing is based on anticipated call
      dates and may vary from contractual maturities.3
            
            Repricing is based on estimated average
lives.




Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, savings, interest bearing demand and money
market deposit accounts will very likely experience a change in deposit rates
more frequently than in their estimated average lives. Additionally, although
certain assets and liabilities may have similar maturities and periods of
repricing, they may react differently to changes in market interest rates. 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.




57




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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
            59Consolidated Balance Sheets
            60Consolidated Statements of Income
      (Loss)
            61Consolidated Statements of Cash Flows
            62Consolidated Statements of Changes in
      Stockholders’ Equity
            63Notes to Consolidated Financial Statements
            64


58




---



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM




To the Board of
Directors and Stockholders ofWest Coast BancorpLake Oswego,
Oregon




We have audited the
accompanying consolidated balance sheets of West Coast Bancorp and subsidiaries
(the "Company") as of December 31, 2009 and 2008, 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, 2009. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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,
2009 and 2008, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2009, 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, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 11, 2010,
expressed an unqualified opinion on the Company's internal control over
financial reporting.




/s/ DELOITTE & TOUCHE LLP




Portland,
OregonMarch 11, 2010




59




---



WEST COAST
BANCORPCONSOLIDATED BALANCE SHEETS




As of December 31
      (Dollars and shares in thousands)
            2009
            
            2008ASSETSCash and cash equivalents:Cash and due from
    banks
            $
            47,708
            
            
            $
            58,046Federal funds sold
            
            20,559
            
            
            
            6,682Interest-bearing deposits in
      other banks
            
            234,830
            
            
            
            50Total cash and cash equivalents
            
            303,097
            
            
            
            64,778Trading securities
            
            731
            
            
            
            1,546Investment securities available for
      sale, at fair value(amortized cost: $564,615 and $201,150, respectively)
            
            562,277
            
            
            
            198,515Federal Home Loan Bank stock, held at cost
            
            12,148
            
            
            
            10,843Loans held for sale
            
            1,176
            
            
            
            2,860Loans
            
            1,724,842
            
            
            
            2,064,796Allowance for loan losses
            
            (38,490
            )
            
            
            (28,920
            )Loans, net
            
            1,686,352
            
            
            
            2,035,876Premises and equipment, net
            
            28,476
            
            
            
            33,127Other real estate owned, net
            
            53,594
            
            
            
            70,110Goodwill
            
            -
            
            
            
            13,059Core deposit intangible, net
            
            637
            
            
            
            995Bank owned life insurance
            
            24,417
            
            
            
            23,525Other assets
            
            60,642
            
            
            
            60,906Total assets
            $
            2,733,547
            
            
            $
            2,516,140LIABILITIES AND STOCKHOLDERS'
      EQUITYDeposits:Demand
            $
            542,215
            
            
            $
            478,292Savings and interest bearing demand
            
            422,838
            
            
            
            346,206Money market
            
            657,306
            
            
            
            615,588Time deposits
            
            524,525
            
            
            
            584,293Total deposits
            
            2,146,884
            
            
            
            2,024,379Short-term borrowings
            
            12,600
            
            
            
            132,000Long-term borrowings
            
            250,699
            
            
            
            91,059Junior subordinated debentures
            
            51,000
            
            
            
            51,000Reserve for unfunded commitments
            
            928
            
            
            
            1,014Other liabilities
            
            22,378
            
            
            
            18,501Total liabilities
            
            2,484,489
            
            
            
            2,317,953Commitments and contingent liabilities
      (Notes 12 and 21)Stockholders' equity:Preferred stock: no par value, 10,000 shares authorized;Series A issued and outstanding: 1,429 at December 31, 2009
            
            118,124
            
            
            
            -Series B issued and
      outstanding: 121 at December 31, 2009
            
            21,124
            
            
            
            -Common stock: no par value, 50,000
      shares authorized;issued and outstanding: 15,641 at December 31, 2009 and 15,696 at December
      31, 2008
            
            93,246
            
            
            
            92,245Retained earnings
            
            17,950
            
            
            
            107,542Accumulated other comprehensive
      loss
            
            (1,386
            )
            
            
            (1,600
            )Total stockholders'
      equity
            
            249,058
            
            
            
            198,187Total liabilities and stockholders' equity
            $
            2,733,547
            
            
            $
            2,516,140


See notes to consolidated financial
statements.




60




---



WEST COAST
BANCORP CONSOLIDATED
STATEMENTS OF INCOME (LOSS)




Years ended December
      31 (Dollars and shares in thousands, except per share amounts)
            2009
            
            2008
            
            2007INTEREST INCOME:Interest and fees on loans
            $
            100,356
            
            
            $
            129,517
            
            
            $
            169,180Interest on taxable investment
      securities
            
            8,646
            
            
            
            7,700
            
            
            
            10,398Interest on nontaxable investment securities
            
            2,776
            
            
            
            3,251
            
            
            
            3,048Interest on deposits in other
      banks
            
            366
            
            
            
            38
            
            
            
            51Interest on federal funds sold
            
            6
            
            
            
            340
            
            
            
            513Total interest income
            
            112,150
            
            
            
            140,846
            
            
            
            183,190INTEREST EXPENSE:Savings, interest bearing demand deposits and money
market
            
            9,684
            
            
            
            17,174
            
            
            
            28,958Time deposits
            
            14,758
            
            
            
            20,375
            
            
            
            26,078Short-term borrowings
            
            806
            
            
            
            4,312
            
            
            
            7,057Long-term borrowings
            
            6,693
            
            
            
            4,201
            
            
            
            2,765Junior subordinated debentures
            
            1,482
            
            
            
            2,634
            
            
            
            3,612Total interest expense
            
            33,423
            
            
            
            48,696
            
            
            
            68,470Net interest income
            
            78,727
            
            
            
            92,150
            
            
            
            114,720Provision for credit losses
            
            90,057
            
            
            
            40,367
            
            
            
            38,956Net interest income (loss) after provision for credit
    losses
            
            (11,330
            )
            
            
            51,783
            
            
            
            75,764NONINTEREST INCOME:Service charges on deposit accounts
            
            15,765
            
            
            
            15,547
            
            
            
            12,932Payment systems related
revenue
            
            9,399
            
            
            
            9,033
            
            
            
            8,009Trust and investment services
      revenue
            
            4,101
            
            
            
            5,413
            
            
            
            6,390Gains on sales of loans
            
            1,738
            
            
            
            2,328
            
            
            
            3,364Other real estate owned valuation adjustments and (loss) gain on
      sales
            
            (26,953
            )
            
            
            (5,386
            )
            
            
            27Other noninterest income
            
            4,438
            
            
            
            3,252
            
            
            
            2,843Other-than-temporary impairment losses
            
            (192
            )
            
            
            (6,338
            )
            
            
            -Gains (losses) on sales of
      securities
            
            833
            
            
            
            780
            
            
            
            (67
            )Total noninterest income
            
            9,129
            
            
            
            24,629
            
            
            
            33,498NONINTEREST EXPENSE:Salaries and employee benefits
            
            44,608
            
            
            
            47,500
            
            
            
            49,787Equipment
            
            8,120
            
            
            
            7,117
            
            
            
            6,544Occupancy
            
            9,585
            
            
            
            9,440
            
            
            
            8,548Payment systems related
expense
            
            4,036
            
            
            
            3,622
            
            
            
            3,143Professional fees
            
            4,342
            
            
            
            4,317
            
            
            
            2,072Postage, printing and office
      supplies
            
            3,201
            
            
            
            3,834
            
            
            
            3,896Marketing
            
            2,990
            
            
            
            3,583
            
            
            
            4,524Communications
            
            1,574
            
            
            
            1,722
            
            
            
            1,624Goodwill impairment
            
            13,059
            
            
            
            -
            
            
            
            -Other noninterest expense
            
            16,773
            
            
            
            9,188
            
            
            
            5,161Total noninterest
      expense
            
            108,288
            
            
            
            90,323
            
            
            
            85,299INCOME (LOSS) BEFORE INCOME
    TAXES
            
            (110,489
            )
            
            
            (13,911
            )
            
            
            23,963PROVISION (BENEFIT) FOR INCOME TAXES
            
            (19,276
            )
            
            
            (7,598
            )
            
            
            7,121NET INCOME (LOSS)
            $
            (91,213
            )
            
            $
            (6,313
            )
            
            $
            16,842Basic
      earnings (loss) per share
            
            ($5.83
            )
            
            
            ($0.41
            )
            
            
            $1.08Diluted earnings (loss) per
      share
            
            ($5.83
            )
            
            
            ($0.41
            )
            
            
            $1.04Weighted average common shares
            
            15,510
            
            
            
            15,472
            
            
            
            15,507Weighted average diluted
      shares
            
            15,510
            
            
            
            15,472
            
            
            
            16,045


See notes to consolidated financial
statements.




61




---



WEST COAST
BANCORP CONSOLIDATED
STATEMENTS OF CASH FLOWS




Years ended December
      31 (Dollars in thousands)
            2009
            
            2008
            
            2007CASH FLOWS FROM OPERATING
      ACTIVITIES:Net income (loss)
            $
            (91,213
            )
            
            $
            (6,313
            )
            
            $
            16,842Adjustments to reconcile net income
      (loss) to net cash provided by operating activities:Depreciation, amortization and accretion
            
            8,281
            
            
            
            4,520
            
            
            
            4,747Amortization of tax credits
            
            1,320
            
            
            
            1,264
            
            
            
            916Deferred income tax expense (benefit)
            
            11,926
            
            
            
            3,811
            
            
            
            (12,879
            )Amortization of intangibles
            
            358
            
            
            
            437
            
            
            
            541Provision for credit losses
            
            90,057
            
            
            
            40,367
            
            
            
            38,956Goodwill impairment
            
            13,059
            
            
            
            -
            
            
            
            -Decrease in accrued interest receivable
            
            591
            
            
            
            5,535
            
            
            
            80Increase in other assets
            
            (14,854
            )
            
            
            (12,268
            )
            
            
            (8,880
            )Loss on impairment of securities
            
            192
            
            
            
            6,338
            
            
            
            -(Gains) losses on sales of
      securities
            
            (833
            )
            
            
            (780
            )
            
            
            67Realized net loss on derivatives
            
            -
            
            
            
            -
            
            
            
            34Net (gain) loss on disposal of premises
      and equipment
            
            186
            
            
            
            14
            
            
            
            (63
            )Other real estate owned valuation adjustments and loss (gain) on
      sales
            
            26,953
            
            
            
            5,386
            
            
            
            (27
            )Gains on sale of loans
            
            (1,738
            )
            
            
            (2,328
            )
            
            
            (3,364
            )Origination of loans held for sale
            
            (66,485
            )
            
            
            (61,159
            )
            
            
            (93,213
            )Proceeds from sales of loans held for
      sale
            
            69,907
            
            
            
            63,814
            
            
            
            100,976Increase (decrease) in interest payable
            
            359
            
            
            
            (579
            )
            
            
            140Increase (decrease) in other
      liabilities
            
            3,345
            
            
            
            (21,151
            )
            
            
            13,335Increase in cash surrender value of bank owned life
    insurance
            
            (892
            )
            
            
            (913
            )
            
            
            (894
            )Stock based compensation
    expense
            
            1,520
            
            
            
            2,865
            
            
            
            2,030Excess tax deficiency associated with stock plans
            
            (496
            )
            
            
            -
            
            
            
            (144
            )Decrease (increase) in trading
      securities
            
            815
            
            
            
            36
            
            
            
            (507
            )Net cash provided by operating activities
            
            52,358
            
            
            
            28,896
            
            
            
            58,693CASH FLOWS FROM INVESTING
      ACTIVITIES:Proceeds from maturities of available for sale securities
            
            69,140
            
            
            
            51,151
            
            
            
            109,658Proceeds from sales of available for
      sale securities
            
            36,189
            
            
            
            35,033
            
            
            
            2,718Purchase of available for sale securities
            
            (467,360
            )
            
            
            (32,854
            )
            
            
            (52,961
            )Purchase of Federal Home Loan Bank
      stock
            
            (1,305
            )
            
            
            (4,849
            )
            
            
            (385
            )Redemption of Federal Home Loan Bank stock
            
            -
            
            
            
            4,301
            
            
            
            -Investments in tax credits
            
            (9
            )
            
            
            (476
            )
            
            
            (140
            )Loans made to customers less (greater) than principal collected on
      loans
            
            185,293
            
            
            
            (38,373
            )
            
            
            (237,832
            )Purchase of loans
            
            -
            
            
            
            -
            
            
            
            (2,203
            )Proceeds from the sale of other real estate owned
            
            68,670
            
            
            
            16,969
            
            
            
            565Proceeds from the sales of premises and
      equipment
            
            -
            
            
            
            31
            
            
            
            442Capital expenditures on other real estate owned
            
            (4,881
            )
            
            
            (1,230
            )
            
            
            (57
            )Capital expenditures on premises and
      equipment
            
            (1,275
            )
            
            
            (3,124
            )
            
            
            (7,645
            )Net cash provided (used) by investing
      activities
            
            (115,538
            )
            
            
            26,579
            
            
            
            (187,840
            )CASH FLOWS FROM FINANCING
      ACTIVITIES:Net increase (decrease) in demand, savings and interestbearing transaction accounts
            
            182,273
            
            
            
            (104,481
            )
            
            
            61,695Net increase (decrease) in time
      deposits
            
            (59,768
            )
            
            
            34,028
            
            
            
            26,785Proceeds from issuance of junior subordinated debentures, net of
      costs
            
            -
            
            
            
            -
            
            
            
            17,500Repayment of junior subordinated
      debentures
            
            -
            
            
            
            -
            
            
            
            (7,500
            )Proceeds from issuance of short-term borrowings
            
            347,600
            
            
            
            2,321,801
            
            
            
            2,691,498Repayment of short-term
    borrowings
            
            (479,600
            )
            
            
            (2,391,801
            )
            
            
            (2,654,916
            )Proceeds from issuance of long-term borrowings
            
            192,240
            
            
            
            42,959
            
            
            
            40,100Repayment of long-term
    borrowings
            
            (20,000
            )
            
            
            -
            
            
            
            (15,000
            )Proceeds from issuance of preferred stock, net of costs
            
            139,248
            
            
            
            -
            
            
            
            -Repurchase of common stock
            
            -
            
            
            
            -
            
            
            
            (5,847
            )Activity in deferred compensation plan
            
            (1
            )
            
            
            (50
            )
            
            
            (84
            )Proceeds from issuance of common
      stock
            
            -
            
            
            
            25
            
            
            
            2,325Redemption of stock pursuant to stock plans
            
            (22
            )
            
            
            (190
            )
            
            
            (639
            )Tax benefit (expense) associated with
      equity plans
            
            -
            
            
            
            (287
            )
            
            
            853Excess tax benefit from stock based compensation
            
            -
            
            
            
            -
            
            
            
            144Cash dividends paid
            
            (471
            )
            
            
            (6,503
            )
            
            
            (7,765
            )Net cash provided (used) by financing activities
            
            301,499
            
            
            
            (104,499
            )
            
            
            149,149NET INCREASE (DECREASE) IN CASH AND CASH
      EQUIVALENTS
            
            238,319
            
            
            
            (49,024
            )
            
            
            20,002CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
            
            64,778
            
            
            
            113,802
            
            
            
            93,800CASH AND CASH EQUIVALENTS AT END OF
      YEAR
            $
            303,097
            
            
            $
            64,778
            
            
            $
            113,802


See notes to consolidated financial
statements.




62




---



WEST COAST
BANCORP  CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY




AccumulatedOther(Shares and dollars in thousands)
            
            Preferred
            
            Common Stock
            
            
            Retained
            
            ComprehensiveStock
            
            Shares
            
            Amount
            
            Earnings
            
            Income (Loss)
            
            TotalBALANCE, January 1, 2007
            
            -
            
            
            15,586
            
            
            $
            91,244
            
            
            $
            109,952
            
            
            $
            (314
            )
            
            $
            200,882Comprehensive income:Net income
            
            -
            
            
            -
            
            
            
            -
            
            
            
            16,842
            
            
            
            -
            
            
            $
            16,842Other comprehensive income, net of
      tax:Net
      unrealized investment/derivative loss
            
            -
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (119
            )
            
            
            (119
            )Other
      comprehensive loss, net of tax
            
            -
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (119
            )Comprehensive income
            
            -
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            16,723Cash dividends, $.51 per common share
            
            -
            
            
            -
            
            
            
            -
            
            
            
            (8,002
            )
            
            
            -
            
            
            
            (8,002
            )Issuance of common stock-stock
      options
            
            -
            
            
            162
            
            
            
            2,325
            
            
            
            -
            
            
            
            -
            
            
            
            2,325Redemption 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
            
            
            
            -
            
            
            
            -
            
            
            
            2,030Tax benefit associated with stock
      plans
            
            -
            
            
            -
            
            
            
            853
            
            
            
            -
            
            
            
            -
            
            
            
            853BALANCE, December 31, 2007
            
            -
            
            
            15,593
            
            
            
            89,882
            
            
            
            118,792
            
            
            
            (433
            )
            
            
            208,241Comprehensive 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
            
            
            
            -
            
            
            
            -
            
            
            
            25Redemption 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
            
            
            
            -
            
            
            
            -
            
            
            
            2,865Tax 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
            )
            
            
            198,187Comprehensive loss:Net
      loss
            
            -
            
            
            -
            
            
            
            -
            
            
            
            (91,213
            )
            
            
            -
            
            
            $
            (91,213
            )Other
      comprehensive income, net of tax:Net
      unrealized investment gain
            
            -
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,149
            
            
            
            2,149Other
      comprehensive income, net of tax
            
            -
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,149Comprehensive loss
            
            -
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            (89,064
            )Cumulative effect of adopting ASC
      320
            
            -
            
            
            -
            
            
            
            -
            
            
            
            1,935
            
            
            
            (1,935
            )
            
            
            -Cash dividends, $.02 per common share
            
            -
            
            
            -
            
            
            
            -
            
            
            
            (314
            )
            
            
            -
            
            
            
            (314
            )Redemption of stock pursuant to stock
      plans
            
            -
            
            
            (12
            )
            
            
            (22
            )
            
            
            -
            
            
            
            -
            
            
            
            (22
            )Issuance of Series A preferred stock, net of costs
            
            118,124
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            118,124Issuance of Series B preferred stock and
      warrant, net of costs
            
            21,124
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            21,124Activity in deferred compensation plan
            
            -
            
            
            (43
            )
            
            
            (1
            )
            
            
            -
            
            
            
            -
            
            
            
            (1
            )Stock based compensation
    expense
            
            -
            
            
            -
            
            
            
            1,520
            
            
            
            -
            
            
            
            -
            
            
            
            1,520Tax adjustment associated with stock plans
            
            -
            
            
            -
            
            
            
            (496
            )
            
            
            -
            
            
            
            -
            
            
            
            (496
            )BALANCE, December 31, 2009
            
            139,248
            
            
            15,641
            
            
            $
            93,246
            
            
            $
            17,950
            
            
            $
            (1,386
            )
            
            $
            249,058


See notes to
consolidated financial statements.




63




---



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 65 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.




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, 2009, 2008 and
2007.




(Dollars in
      thousands)
            
            December 31,2009
            
            2008
            
            2007Supplemental cash flow information:Cash (received) paid in the year for:Interest
            
            $
            33,063
            
            
            $
            49,275
            
            
            $
            68,330Income taxes
            
            $
            (14,585
            )
            
            $
            4,385
            
            
            $
            19,131Noncash investing and financing
      activities:Change in unrealized gain (loss) on
      availablefor sale securities and derivatives, net
      of tax
            
            $
            2,149
            
            
            $
            (1,167
            )
            
            $
            (119
            )Dividends declared
      and accrued in other liabilities
            
            $
            -
            
            
            $
            157
            
            
            $
            2,110OREO
      and premises and equipment expendituresaccrued
      in other liabilities
            
            $
            242
            
            
            $
            129
            
            
            $
            -Transfer of loans to OREO
            
            $
            74,174
            
            
            $
            87,881
            
            
            $
            3,793


64




---



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, 2009 and 2008 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.
For equity securities where declines in fair value are deemed
other-than-temporary and the Company does not have the ability and intent to
hold the securities until recover, OTTI is recognized in noninterest income.
Under new guidance issued in April 2009, the Company considers whether a debt
security will be sold or if it is likely to be required to be sold prior to the
recovery of any unrealized loss. Intent to sell or a requirement to sell debt
securities prior to recovery would result in recognizing the entire impairment
as OTTI in noninterest income. If the Company does not intend to sell impaired
debt securities, will not be required to sell them prior to recovery, and the
Company does not expect to recover its entire amortized cost basis of the
securities, the portion of impairment loss specifically related to credit losses
is recognized in noninterest income. The portion of impairment loss related to
all other factors is recognized as a separate category in other comprehensive
income (loss).




Valuation of Investment Securities Available for Sale. Investment securities are
valued utilizing a number of methods including quoted prices in active markets,
quoted prices for similar assets, quoted prices for securities in inactive
markets and inputs derived principally from or corroborated by observable market
data by correlation or other means. In addition, certain investment securities
are valued based on the Company’s own assumptions using the best information
available using a discounted cash flow model.




Federal Home Loan Bank Stock. Federal Home Loan Bank (“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 prior notice to the FHLB of five years for FHLB B stock
or six months for FHLB A stock. The Company analyzed FHLB stock for OTTI and
concluded that no impairment exists at December 31, 2009. This conclusion is
based on FHLB’s capital ratios in excess of regulatory minimums, strong
liquidity position, and a healthy net interest income.




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 (loss) 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 21 in the notes to consolidated
financial statements.




65




---



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 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
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”). 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.




66




---



1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)




Goodwill and Intangible Assets.  At March 31, 2009,
based on management’s analysis and continued deteriorating economic conditions
and the length of time and amount by which the Company’s book value per share
had exceeded its market value per share, the Company determined it was
appropriate to write off the entire $13.1 million of goodwill related to its
acquisition of Mid-Valley Bank in June, 2006.




Core deposit intangibles are reviewed for
impairment at least annually as of year-end. At December 31, 2009 it was
determined that core deposit intangibles were not impaired. If impairment were
deemed to exist, the core deposit intangibles would be written down to estimated
fair value, resulting in a charge to earnings in the period in which the write
down occurs.




Income Taxes .
Income taxes are accounted for using the asset and liability method. Under this
method, a deferred tax asset or liability is determined based on the enacted tax
rates that will be in effect when the differences between the financial
statement carrying amounts and tax basis of existing assets and liabilities are
expected to be reported in Bancorp’s income tax returns. The deferred tax
provision (benefit) for the year is equal to the net change in the net deferred
tax asset from the beginning to the end of the year, less amounts applicable to
the change in value related to investment securities available for sale. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company records net deferred tax
assets to the extent these assets will more likely than not be realized. In
making such determination, all available positive and negative evidence
including future reversals of existing taxable temporary differences, projected
future taxable income, tax planning strategies and recent financial results. A
deferred tax asset valuation allowance is established to reduce the net carrying
amount of deferred tax assets if it is determined to be more likely than not,
that all or some portion of the potential deferred tax asset will not be
realized. See Note 17 “Income taxes” of the notes to consolidated financial
statements for more detail.




Operating Segments. Public enterprises are required to report certain information about their
operating segments in the financial statements. The basis for determining the
Company’s operating segments is the way in which management operates the
businesses. Bancorp has identified two reportable segments, “banking” and
“other” which includes West Coast Trust. See Note 23, “Segment and Related
Information” of the notes to consolidated financial statements for more detail.




Trust Company Assets. Assets (other than cash deposits) held by West Coast Trust in fiduciary
or agency capacities for its trust customers are not included in the
accompanying consolidated balance sheets, because such items are not assets of
West Coast Trust.




Borrowings . Federal funds purchased and securities sold
under agreements to repurchase generally mature within one to four days from the
transaction date. Other short-term borrowed funds mature within one year from
the date of this financial statement. Long-term borrowed funds extend beyond one
year and are reclassed to short-term borrowings when the long term borrowed
funds mature within one year and there is no intent to refinance.




Earnings (Loss) Per Share. Earnings (loss) per share is calculated under the two-class method. The
two-class method is an earnings allocation formula that determines earnings
(loss) per share for each class of common stock and participating security
according to dividends declared (or accumulated) and participation rights in
undistributed earnings. The Company has issued restricted stock that qualifies
as a participating security. Basic earnings (loss) per share is computed by
dividing net income (loss) available to common shareholders less the net income
(loss) allocated to participating nonvested restricted stock awards divided by
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings (loss) per share is computed in the same manner as
basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if certain shares issuable upon exercise of options, warrants and nonvested
restricted stock were included unless those additional shares would have been
anti-dilutive. All prior period earnings per share amounts have been
retrospectively adjusted to reflect the impact of participating
securities.




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.




67




---



1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)




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 June 2009, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 105
“Generally Accepted Accounting Principles,” which established the Accounting
Standards Codification (“Codification”) as the source of authoritative Generally
Accepted Accounting Principles (“GAAP”). The Codification did not change U.S.
GAAP, but did combine all authoritative standards into a comprehensive,
topically organized online database. The FASB will not issue new standards in
the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts. Instead, it will issue Accounting Standards Updates to update the
Codification. After the launch of the Codification on July 1, 2009 only one
level of authoritative U.S. GAAP for nongovernmental entities exists, other than
guidance issued by the Securities and Exchange Commission. The Company
adopted ASC 105 for the period
ended September 30, 2009. The adoption of this guidance did not have an impact
on the Company’s consolidated financial statements.




In June 2008, the FASB issued authoritative
guidance included in ASC 260 “Earnings Per Share” which requires that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method described in
ASC 260. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of
income (loss), its consolidated balance sheet, or its consolidated statement of
cash flows. See Note 16 “Earnings (Loss) Per Share” of the notes to consolidated
financial statement for more detail on earnings (loss) per share.




In April 2009, the FASB issued authoritative
guidance included in ASC 320 “Investments – Debt and Equity Securities” that
amended other-than-temporary impairment guidance for debt securities to require
a new other-than-temporary impairment model that shifts the focus from an
entity’s intent to hold the debt security until recovery to its intent, or
expected requirements to sell the debt security. This guidance is intended to
provide greater clarity to investors about the credit and noncredit component of
an OTTI event and to more effectively communicate when an OTTI event has
occurred. This guidance was applied prospectively with a cumulative effect
transition adjustment as of the beginning of the period in which it was adopted. The Company early adopted the
guidance within ASC 320 as of March 31, 2009 to help users of its financial
statements better understand the Company’s investment portfolio, including its
pooled trust preferred securities. As of March 31, 2009, the Company recorded a
cumulative adjustment in the opening balance of retained earnings of $1.9
million, after taxes of $1.2 million ($3.1 million pretax), to reflect the
adjustment of previously recorded OTTI charges on pooled trust preferred
securities. See Note 2 “Investment Securities” of the notes to consolidated
financial statements for more detail on investment securities.




In April 2009, the FASB issued guidance within
ASC 820 “Fair Value Measurements and Disclosures” which provides additional
guidance on determining whether a market for a financial asset is not active and
a transaction is not distressed for fair value measurements. The authoritative
guidance is applied prospectively and retrospective application is not
permitted. The Company elected early adoption of this guidance to better
evaluate the fair value of securities impacted by inactive markets including the
Company’s pooled trust preferred securities. At March 31, 2009, pooled trust
preferred securities with a book value of $13.9 million were evaluated under the
guidance provided in ASC 820. The adoption of this guidance did not have a material impact on the
Company’s consolidated statement of income (loss), its consolidated balance
sheet, or its consolidated statement of cash flows.




In April 2009, the FASB issued guidance
contained in ASC 825 “Financial Instruments” that requires an entity to provide
disclosures about the fair value of financial instruments in interim financial
information. The guidance applies to all financial instruments within the scope
of ASC 825 and requires entities to disclose the method(s) and significant
assumptions used to estimate the fair value of financial instruments, in both
interim financial statements as well as annual financial statements. The Company
elected early adoption of this guidance which increased the Company’s interim
financial statement disclosures with regard to the fair value of financial
instruments.




68




---



1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)




In May 2009, the FASB issued guidance within
ASC 855 “Subsequent Events.” ASC 855 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It should not
result in significant changes in the subsequent events that an entity reports,
either through recognition or disclosure in its financial statements. This
statement requires disclosure of the date through which a company has evaluated
subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be
issued. This disclosure should alert all users of financial statements that an
entity has not evaluated subsequent events after that date in the set of
financial statements being presented. The Company has adopted ASC 855. The adoption of this guidance did
not have a material impact on the Company’s consolidated financial statements.
In February 2010, the FASB approved the issuance of the Accounting Standards
Update (“ASU”), “Subsequent Events” (Topic 855), “Amendments to Certain
Recognition and Disclosure Requirements.” This guidance revises ASC 855 to allow an
entity whose financial statements are filed or furnished with the SEC (or a
regulator if such filing satisfies the SEC’s requirements) to not be required to
disclose in its financial statements the date through which subsequent events
have been evaluated. The revised guidance will be effective upon issuance for
originally issued and reissued financial statements. The adoption of this revised guidance
will not have a material impact
on the Company’s consolidated statement of income (loss), its consolidated
balance sheet, or its consolidated statement of cash flows.




2. INVESTMENT
SECURITIES




The following table
presents the available for sale investment securities as of December 31, 2009
and 2008:




(Dollars in
      thousands)December 31, 2009
            
            Amortized
            
            Unrealized
            
            UnrealizedCost
            
            Gross
      Gains
            
            Gross
      Losses
            
            Fair
      ValueU.S. Treasury securities
            
            $
            24,907
            
            $
            100
            
            $
            -
            
            
            $
            25,007U.S. Government agency securities
            
            
            104,168
            
            
            300
            
            
            (480
            )
            
            
            103,988Corporate securities
            
            
            14,436
            
            
            -
            
            
            (4,683
            )
            
            
            9,753Mortgage-backed securities
            
            
            344,179
            
            
            3,013
            
            
            (2,898
            )
            
            
            344,294Obligations of state and political
      subdivisions
            
            
            67,651
            
            
            2,562
            
            
            (195
            )
            
            
            70,018Equity investments and other securities
            
            
            9,274
            
            
            2
            
            
            (59
            )
            
            
            9,217Total
            
            $
            564,615
            
            $
            5,977
            
            $
            (8,315
            )
            
            $
            562,277 (Dollars in
      thousands)December 31, 2008
            
            Amortized
            
            Unrealized
            
            UnrealizedCost
            
            Gross
      Gains
            
            Gross
      Losses
            
            Fair
      ValueU.S. Treasury securities
            
            $
            200
            
            $
            23
            
            $
            -
            
            
            $
            223U.S. Government agency securities
            
            
            7,310
            
            
            77
            
            
            -
            
            
            
            7,387Corporate securities
            
            
            12,608
            
            
            937
            
            
            (2,668
            )
            
            
            10,877Mortgage-backed securities
            
            
            94,846
            
            
            602
            
            
            (2,882
            )
            
            
            92,566Obligations of state and political
      subdivisions
            
            
            81,025
            
            
            1,805
            
            
            (432
            )
            
            
            82,398Equity investments and other securities
            
            
            5,161
            
            
            120
            
            
            (217
            )
            
            
            5,064Total
            
            $
            201,150
            
            $
            3,564
            
            $
            (6,199
            )
            
            $
            198,515


Gross realized gains on the sale of investment
securities included in earnings in 2009, 2008, and 2007 were $833,000, $814,000
and $96,000, respectively. Gross realized losses in 2009, 2008, and 2007 were
zero, $34,000, and $163,000, respectively.




In 2008, the Company recorded OTTI charges
totaling $6.3 million pretax consisting of $.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. The $3.1 million OTTI related to two trust preferred
investments was subsequently reversed as of March 31, 2009. In the first quarter
of 2009, the Company recorded OTTI charges totaling $.2 million pretax
consisting of $.1 million relating to a Lehman Brothers bond held in our
corporate securities portfolio and $.1 for the investment in Freddie Mac
preferred stock held in our equity and other securities portfolio. Both of these
investments were sold in the second quarter of 2009 for no additional gain or
loss.




Dividends on equity investments for
the years 2009, 2008, and 2007 were $106,000, $294,000, and $302,000,
respectively.




69




---



2. INVESTMENT
SECURITIES (continued)




Our U.S. Treasury and U.S. Government agency
securities increased by $121.4 million from December 31, 2008, to December 31,
2009, as part of our effort to improve liquidity, limit risk-weighted assets,
and to make additional securities available to meet pledging requirements for
public deposits and government borrowing sources such as the FHLB.




Our corporate security portfolio had a $4.7
million unrealized loss at December 31, 2009. The majority of this loss was
associated with the decline in market value of our investments in pooled trust
preferred securities issued primarily by banks and insurance companies. An
increase in credit and liquidity spreads contributed to the unrealized loss
associated with these securities which had a $13.9 million carrying value and a
$9.2 million estimated fair value at December 31, 2009. These securities are
rated CCC or better and have several features that reduce credit risk, including
seniority over certain tranches in the same pool and the benefit of certain
collateral coverage tests.




The following table provides information on
investment securities with 12 month or greater continuous unrealized losses as
of December 31, 2009:




(Dollars in
      thousands)
            
            Amortized cost of
            
            Fair value ofDecember 31, 2009
            
            securities with an
            
            securities with anunrealized loss more than
            
            unrealized loss more than
            
            Unrealized12 continuous
      months
            
            12 continuous
      months
            
            Gross
      LossesCorporate Securities
            
            $
            13,936
            
            $
            9,253
            
            $
            (4,683
            )Mortgage-backed securities
            
            
            6,706
            
            
            5,882
            
            
            (824
            )Obligations of state and political
      subdivisions
            
            
            2,012
            
            
            1,866
            
            
            (146
            )Total
            
            $
            22,654
            
            $
            17,001
            
            $
            (5,653
            )


There were 9 investment securities with a 12
month or greater continuous unrealized loss in the investment portfolio at
December 31, 2009, with a total unrealized loss of $5.7 million. In comparison,
at December 31, 2008, there were also 9 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 primarily due to increases in credit and liquidity spreads and an
extension of expected cash flow causing a decline in the fair market value
subsequent to the purchase of our pooled trust preferred securities (corporate
security category). These securities had an estimated fair value of $9.2 million
compared to a $13.9 million carrying value at December 31, 2009. The value of
most of our securities fluctuates as market interest rates change.




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, 2009:




(Dollars in thousands)
            
            Amortized cost of
            
            Fair value ofDecember 31, 2009
            
            securities with an
            
            securities with anunrealized loss less than
            
            unrealized loss less than
            
            Unrealized12 continuous
      months
            
            12 continuous
      months
            
            Gross
      LossesU.S. Government agency
    securities
            
            $
            65,902
            
            $
            65,422
            
            $
            (480
            )Mortgage-backed securities
            
            
            138,387
            
            
            136,313
            
            
            (2,074
            )Obligations of state and political
      subdivisions
            
            
            2,519
            
            
            2,470
            
            
            (49
            )Equity investments and other securities
            
            
            4,795
            
            
            4,736
            
            
            (59
            )Total
            
            $
            211,603
            
            $
            208,941
            
            $
            (2,662
            )


There were a total of 37 securities in
Bancorp’s investment portfolio at December 31, 2009, that have been in a
continuous unrealized loss position for less than 12 months, with a book value
of $211.6 million and a total unrealized loss of $2.7 million. At December 31,
2008, there were a total of 45 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 $67.6 million and a total unrealized loss of $5.1 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 review and evaluation of
the Company’s debt securities, the Bank does not intend to sell any debt
securities which have an unrealized loss, it is unlikely the Company will be
required to sell these securities before recovery, and we expect to recover the
entire amortized cost of these impaired securities. Therefore the debt
securities with unrealized losses were not considered to have OTTI. In addition,
the unrealized loss on equity securities is considered temporary and the Company
has the intent and ability to hold equity investments until recovery, therefore
these securities were not considered other-than-temporarily
impaired.




At December 31, 2009 and 2008, the Company had
$399.0 and $97.9 million, respectively, in investments securities pledged as
collateral for borrowings and public funds. At December 31, 2009 and December
31, 2008, Bancorp had no reverse repurchase agreements.




70




---



2. INVESTMENT
SECURITIES (continued)




The follow table presents the
maturities of the investment portfolio at December 31, 2009:




(Dollars in thousands)
            
            Available for
      saleAmortized
      cost
            
            Fair
      valueU.S. Treasury securitiesOne year or
less
            
            $
            10,083
            
            $
            10,101After one year through
      five years
            
            
            14,824
            
            
            14,906After five through ten
      years
            
            
            -
            
            
            -Due after ten
    years
            
            
            -
            
            
            -Total
            
            
            24,907
            
            
            25,007U.S. Government agency
    securities:One year or
less
            
            
            903
            
            
            918After one year through
      five years
            
            
            92,740
            
            
            92,495After five through ten
      years
            
            
            10,525
            
            
            10,575Due after ten
    years
            
            
            -
            
            
            -Total
            
            
            104,168
            
            
            103,988Corporate securities:One year or
less
            
            
            -
            
            
            -After one year through
      five years
            
            
            500
            
            
            500After five through ten
      years
            
            
            -
            
            
            -Due after ten
    years
            
            
            13,936
            
            
            9,253Total
            
            
            14,436
            
            
            9,753Obligations of state and political
      subdivisions:One year or
less
            
            
            5,232
            
            
            5,297After one year through
      five years
            
            
            23,095
            
            
            24,303After five through ten
      years
            
            
            28,342
            
            
            29,377Due after ten
    years
            
            
            10,982
            
            
            11,041Total
            
            
            67,651
            
            
            70,018Sub-total
            
            
            211,162
            
            
            208,766Mortgage-backed securities
            
            
            344,179
            
            
            344,294Equity investments and other securities
            
            
            9,274
            
            
            9,217Total
      securities
            
            $
            564,615
            
            $
            562,277


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.




71




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3. LOANS AND
ALLOWANCE FOR CREDIT LOSSES




The following table presents the
loan portfolio as of December 31, 2009 and 2008:




(Dollars in thousands)
            
            December
      31,2009
            
            2008Commercial loans
            
            $
            370,077
            
            
            $
            482,405Real estate construction
            
            
            99,310
            
            
            
            285,149Real estate mortgage
            
            
            374,668
            
            
            
            393,208Commercial real estate
            
            
            862,193
            
            
            
            882,092Installment and other consumer
            
            
            18,594
            
            
            
            21,942Total loans
            
            
            1,724,842
            
            
            
            2,064,796Allowance for loan losses
            
            
            (38,490
            )
            
            
            (28,920
            )Total loans,
net
            
            $
            1,686,352
            
            
            $
            2,035,876


Total loans decreased by 17% or $340 million
from the balance at December 31, 2008, in large part due to the $186 million or
65%, decline in real estate construction loan balances during 2009.




At December 31, 2009 and 2008, the allowance
for loan losses was $38.5 million and $28.9 million, respectively, while the
reserve for unfunded commitments was $.9 million and $1.0 million, respectively.
The following is an analysis of the changes in the allowance for credit losses:




(Dollars in thousands)
            
            Year Ended
      December 31,2009
            
            2008
            
            2007Balance, beginning of period
            
            $
            29,934
            
            
            $
            54,903
            
            
            $
            23,017Provision for credit losses
            
            
            90,057
            
            
            
            40,367
            
            
            
            38,956Losses charged to the
allowance
            
            
            (82,345
            )
            
            
            (68,255
            )
            
            
            (7,713
            )Recoveries credited to the allowance
            
            
            1,772
            
            
            
            2,919
            
            
            
            643Balance, end of period
            
            $
            39,418
            
            
            $
            29,934
            
            
            $
            54,903Components of allowance for credit
      lossesAllowance for loan losses
            
            $
            38,490
            
            
            $
            28,920Reserve for unfunded
    commitments
            
            
            928
            
            
            
            1,014Total allowance for credit losses
            
            $
            39,418
            
            
            $
            29,934


The provision for credit losses of $90.1
million for 2009 was primarily caused by negative risk rating changes within the
loan portfolio and higher net charge-offs related to our loan portfolio outside
the two-step program. The provision for credit losses of $40.4 million for 2008
increased $1.4 million as compared to 2007, largely due to the adverse risk
rating migration as well as higher net loan charge-offs in the commercial and
non two-step residential construction loan portfolios offset by a lower
provision for the two-step loan portfolio.




Loans on which the accrual of interest has
been discontinued were approximately $99.3 million, $127.6 million and $26.4
million at December 31, 2009, 2008, and 2007, respectively. Interest income
foregone on nonaccrual loans was approximately $10.7 million, $13.6 million and
$1.4 million in 2009, 2008, and 2007, respectively.




At December 31, 2009 and 2008,
Bancorp’s recorded investment in certain loans that were considered to be
impaired was $98.8 million and $161.9 million, respectively. At December 31,
2009 and 2008, there were no specific valuation allowances for impaired loans.




The average recorded investment in impaired
loans for the years ended December 31, 2009, 2009 and 2007 was approximately,
$134.3 million, $128.6 million and $15.5 million, respectively. For the years
ended December 31, 2009, 2008 and 2007, interest income recognized on impaired
loans totaled $526,000, $1,195,000, and $23,000, respectively, all of which was
recognized on a cash basis.




At December 31, 2009, Bancorp had $22.8
million in loans classified as troubled debt restructurings of which $11.7
million was on accrual status, with the remaining $11.1 million on nonaccrual
status. A total of $16.0 million in restructurings were considered impaired at
December 31, 2009. Bancorp has no additional commitments to lend on the troubled
debt restructurings at December 31, 2009. Troubled debt restructurings were
$31.2 million at December 31, 2008, all of which were associated with our
two-step construction loan program. The modifications granted on troubled debt
restructurings were due in part to borrower financial difficulty, and generally
provide for a temporary modification of loan terms.




At December 31, 2009 and 2008, Bancorp had
$1.2 million and $1.2 million, respectively, of overdrafts classified as loans
in the installment and other consumer loan category.




72




---



4. PREMISES AND
EQUIPMENT




Premises and equipment consists of
the following:




(Dollars in thousands)
            
            December
      31,2009
            
            2008Land
            
            $
            4,439
            
            
            $
            4,439Buildings and improvements
            
            
            30,832
            
            
            
            30,306Furniture and equipment
            
            
            28,147
            
            
            
            28,815Construction in progress
            
            
            370
            
            
            
            2,29463,788
            
            
            
            65,854Accumulated depreciation
            
            
            (35,312
            )
            
            
            (32,727
            )Total
            
            $
            28,476
            
            
            $
            33,127


Depreciation included in occupancy and
equipment expense amounted to $5.9 million, $4.7 million, and $4.6 million for
the years ended December 31, 2009, 2008, and 2007, respectively. Depreciation
for all premises and equipment is calculated using the straight-line method. The
Company periodically reviews the recorded value of its long-lived assets,
specifically premises and equipment, to determine whether impairment exists. No
impairments were recorded during 2009, 2008, or 2007.




5. 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 depositGoodwill
            
            intangibleBalance, January 1, 2008
            
            $
            13,059
            
            
            $
            1,432Amortization
            
            
            -
            
            
            
            (437
            )Balance, December 31, 2008
            
            $
            13,059
            
            
            $
            995Amortization
            
            
            -
            
            
            
            (358
            )Impairment
            
            
            (13,059
            )
            
            
            -Balance, December 31, 2009
            
            $
            -
            
            
            $
            637


The goodwill impairment analysis requires
management to make judgments in determining if an indicator of impairment has
occurred and involves a two-step process. The first step was a comparison of the
Bank’s fair value to its carrying value. We estimated fair value using a
combination of quoted market price and an estimate of a control premium. The
results of the analysis concluded that the estimated fair value of the Company’s
Bank reporting unit was less than its book value and the carrying amount of the
Company’s Banking reporting unit goodwill exceeded its implied fair value.
Therefore, the Company failed step one and moved to the second step which
required allocation of 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.




At March 31, 2009, based on management’s
analysis and continued deteriorating economic conditions and the length of time
and amount by which the Company’s book value per share had exceeded its market
value per share, the Company determined the Company’s Bank reporting unit
goodwill exceeded its implied fair value at March 31, 2009 and it was
appropriate to write off the entire $13.1 million of goodwill related to its
acquisition of Mid-Valley Bank in June 2006.




The following table presents the
forecasted core deposit intangible asset amortization expense for 2010 through
2013:




(Dollars in thousands)
            
            Full yearexpectedYear
            
            amortization2010
            
            $
            2792011
            
            
            1992012
            
            
            1192013
            
            
            40


73




---



6. OTHER REAL ESTATE
OWNED, NET




The following table summarizes
Bancorp’s OREO for the years ended December 31, 2009 and 2008:




(Dollars in thousands)
            
            December
      31,2009
            
            2008Balance, beginning period
            
            $
            70,110
            
            
            $
            3,255Additions to OREO
            
            
            79,107
            
            
            
            89,128Disposition of OREO
            
            
            (77,061
            )
            
            
            (17,488
            )Valuation adjustments in the period
            
            
            (18,562
            )
            
            
            (4,785
            )Total OREO
            
            $
            53,594
            
            
            $
            70,110


The following table summarizes
Bancorp’s OREO valuation allowance for the years ended December 31, 2009 and
2008:




(Dollars in thousands)
            
            December
      31,2009
            
            2008Balance, beginning period
            
            $
            3,920
            
            
            $
            175Additions to the valuation allowance
            
            
            18,562
            
            
            
            4,785Deductions from the valuation
      allowance
            
            
            (12,993
            )
            
            
            (1,040
            )Total OREO valuation allowance
            
            $
            9,489
            
            
            $
            3,920


7 . OTHER ASSETS




The following table summarizes
Bancorp’s other assets for the years ended December 31, 2009 and 2008:




(Dollars in thousands)
            
            December
      31,2009
            
            2008Deferred tax assets, net
            
            $
            3,249
            
            
            $
            15,258Accrued interest receivable
            
            
            10,415
            
            
            
            11,006Investment in affordable housing tax
      credits
            
            
            4,833
            
            
            
            5,912Income taxes receivable
            
            
            31,493
            
            
            
            16,579Other
            
            
            10,652
            
            
            
            12,151Total other assets
            
            $
            60,642
            
            
            $
            60,906


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.




8. 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 $6.1 million and $5.7
million during the years ended December 31, 2009 and 2008,
respectively.




74




---



9. BORROWINGS




The following table summarizes
Bancorp’s borrowings for the years ended December 31, 2009 and 2008:




(Dollars in thousands)
            
            December
      31,2009
            
            2008Short-term borrowings:FHLB advances
            
            $
            12,600
            
            $
            132,000Long-term borrowings:FHLB
      non-putable advances
            
            
            220,699
            
            
            61,059FHLB putable
      advances
            
            
            30,000
            
            
            30,000Total
      long-term borrowings
            
            
            250,699
            
            
            91,059Total borrowings
            
            $
            263,299
            
            $
            223,059


FHLB advances are collateralized, as provided
for in an “Advances, Security and Deposit Agreement” with the FHLB of Seattle,
by investment securities and qualifying loans. This advance agreement requires
FHLB prior consent to utilize available credit. At December 31, 2009, the
Company had additional borrowing capacity available at the FHLB of $210.3
million based on pledged collateral.




Long-term borrowings at December 31, 2009,
consisted of notes with fixed maturities (non-putable) and putable advances with
the FHLB totaling $250.7 million. Total long-term borrowings with fixed
maturities were $220.7 million, with rates ranging from 1.91% to 5.42%. Bancorp
had three putable advances totaling $30.0 million, with original terms of five
years at rates ranging from 2.45 % to 3.78%. The scheduled maturities on these
putable advances occur in February 2013, August 2013, and March 2014, although
the FHLB may under certain circumstances require repayment of these putable
advances prior to maturity. Principal payments due at scheduled maturity of
Bancorp’s long-term borrowings at December 31, 2009, are $56.5 million in 2011,
$80.1 million in 2012, $71.9 million in 2013, and $42.2 million in
2014.




Long-term borrowings at December 31, 2008
consist of notes with fixed maturities and putable advances with the FHLB
totaling $91.1 million. Total long-term borrowings with fixed maturities were
$61.1 million. Bancorp had three putable advances totaling $30.0 million with
original terms of between three and five years, and final maturities in
September 2010, February 2013 and August 2013. 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, 2009 and 2008.




75




---



10. JUNIOR
SUBORDINATED DEBENTURES




At December 31, 2009, six wholly-owned
subsidiary grantor trusts established by Bancorp had issued and sold $51 million
of 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. During
2009, the Company exercised its right to defer regularly scheduled interest
payments on outstanding junior subordinated debentures related to its trust
preferred securities. The Company will accrue interest expense on these junior
subordinated debentures and may not pay dividends on its Common Stock until all
accrued but unpaid interest has been paid in full.




The following table is a summary of
outstanding trust preferred securities at December 31, 2009:




Preferred security
            
            Rate type
            
            
            
            Rate at
            
            
            
            Next possibleIssuance
    Trust
            
            Issuance date
            
            amount
            
            1
            
            Initial rate
            
            12/31/09
            
            Maturity date
            
            redemption date2West Coast Statutory Trust III
            
            September 2003
            
            $
            7,500
            
            Variable
            
            6.75%
            
            3.20%
            
            September 2033
            
            Currently redeemableWest Coast Statutory Trust IV
            
            March 2004
            
            $
            6,000
            
            Variable
            
            5.88%
            
            3.04%
            
            March 2034
            
            Currently redeemableWest Coast Statutory Trust V
            
            April 2006
            
            $
            15,000
            
            Variable
            
            6.79%
            
            1.68%
            
            June 2036
            
            June 2011West Coast Statutory Trust VI
            
            December 2006
            
            $
            5,000
            
            Variable
            
            7.04%
            
            1.93%
            
            December 2036
            
            December 2011West Coast Statutory Trust VII
            
            March 2007
            
            $
            12,500
            
            Variable
            
            6.90%
            
            1.80%
            
            March 2037
            
            March 2012West Coast Statutory Trust VIII
            
            June 2007
            
            $
            5,000
            
            Variable
            
            6.74%
            
            1.63%
            
            June 2037
            
            June 2012Total
            
            $
            51,000
            
            
            
            Weighted rate
            
            2.12%


1
            
            The variable rate preferred securities reprice
      quarterly.2
            
            Securities are redeemable at the option of Bancorp following these
      dates.




The interest rates on the trust preferred
securities 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, 2009 and 2008, as junior subordinated
debentures. Bancorp records interest expense on the corresponding junior
subordinated debentures in the consolidated statements of income (loss). 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,
2009 and 2008.




76




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11. 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 2009. Bancorp may
also elect to make discretionary contributions to the plan. No discretionary
contributions were made in 2009, 2008 or 2007. 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
2009 and 2008, and $.94 million for 2007, 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 is available to Bancorp’s creditors and recorded as trading
securities in our consolidated balance sheets, and invested consistent with the
participants’ direction among a variety of investment alternatives. A deferred
compensation liability of $1.5 million was included in other liabilities as of
December 31, 2009, compared to $1.9 million at December 31, 2008.




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 31,2009
            
            2008Beginning balance
            
            $
            2,356
            
            
            $
            2,223Benefit expense
            
            
            281
            
            
            
            293Benefit payments
            
            
            (123
            )
            
            
            (160
            )Ending balance
            
            $
            2,514
            
            
            $
            2,356


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 2010, is expected to be $.2 million. The benefits
expected to be paid are presented in the following table:




(Dollars in
      thousands)Benefits expected toYear
            
            be
    paid2010
            
            $
            1852011
            
            
            1742012
            
            
            1672013
            
            
            1672014
            
            
            1672015 through 2019
            
            
            835


77




---



12. COMMITMENTS AND
CONTINGENT LIABILITIES




The Company leases land and office space under
51 leases, of which 49 are long-term operating leases that expire between 2010
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, 2009, minimum
future lease payments under these leases and other operating leases were:




(Dollars in thousands)
            
            Minimum FutureYear
            
            Lease
      Payments2010
            
            $
            3,9362011
            
            
            3,8612012
            
            
            3,7672013
            
            
            3,6152014
            
            
            3,034Thereafter
            
            
            7,958Total
            
            $
            26,171


Rental expense for all operating leases was
$4.2 million, $4.1 million, and $3.7 million for the years ended December 31,
2009, 2008, and 2007, 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. STOCKHOLDERS’
EQUITY AND REGULATORY CAPITAL




Authorized capital stock of Bancorp at
December 31, 2009, includes 50,000,000 shares of Common Stock, no par value, and
10,000,000 shares of Preferred Stock, no par value, of which 2,000,000 shares
had been designated as Mandatorily Convertible Cumulative Participating
Preferred Stock, Series A (“Series A Preferred Stock”) and 600,000 shares had
been designated as Mandatorily Convertible Cumulative Participating Preferred
Stock, Series B (“Series B Preferred Stock”). At December 31, 2009, Bancorp had
issued and outstanding 15,640,514 shares of Common Stock, 1,428,849 million
shares of Series A Preferred Stock, and 121,328 shares of Series B Preferred
Stock. No Preferred Stock was issued and outstanding at December 31, 2008.




On January 20, 2010, the Company’s
shareholders approved (i) an amendment of Bancorp's Restated Articles of
Incorporation to increase the number of authorized shares of Common Stock to
250,000,000 and correspondingly to increase the total number of authorized
shares of all classes of stock from 60,000,000 to 260,000,000, and (ii)
conversion of the outstanding Preferred Stock into Common Stock as required by
the rules of The Nasdaq Stock Market (such approvals, the "Shareholder
Approvals").




Under the Company’s stock repurchase plan, the
Company can purchase up to 4.88 million shares of the Company’s Common Stock.
The Company did not repurchase any shares in 2009 nor does it anticipate
repurchasing any shares in the foreseeable future. Total shares available for
repurchase under this plan are 1,052,000 at December 31, 2009.




Preferred stock. In
October 2009, Bancorp issued 1,428,849 shares of Series A Preferred Stock in
connection with its private capital raise. These shares automatically converted
into an aggregate of 71,442,450 shares of Common Stock following receipt of the
Shareholder Approvals on January 20, 2010.




In addition, Bancorp issued an aggregate of
121,328 shares of Series B Preferred Stock in the transactions. These shares
will automatically convert into an aggregate of 6,066,400 shares of Common Stock
upon transfer of the Series B Preferred Stock to third parties in a widely
dispersed offering.




The Series B Preferred Stock is not subject to
the operation of a sinking fund and has no participation rights. The Series B
Preferred Stock is not redeemable by the Company and is perpetual with no
maturity. The holders of Series B Preferred Stock have no general voting rights.
If the Board of Directors declares and pays a dividend in respect of Common
Stock, it must declare and pay to the holders of the Series B Preferred Stock on
the same date a dividend in an amount per share of the Series B Preferred Stock
determined in accordance with the Restated Articles of Incorporation that is
intended to provide such holders dividends in the amount they would have
received if shares of Series B Preferred Stock had been converted into Common
Stock as of that date. There are no accrued dividends or dividends in arrears on
Series B Preferred Stock at December 31, 2009.




Warrants to purchase Series B Preferred Stock. Also in October 2009 as part of the private
capital raise, Bancorp issued Class C Warrants to purchase an aggregate of
240,000 shares of Series B Preferred Stock at an exercise price of $100.00 per
share. The Warrants are immediately exercisable and will expire on October 23,
2016. Following receipt of the Shareholder Approvals, shares of Series B
Preferred Stock issuable upon exercise of the Warrants will automatically
convert into an aggregate of 12.0 million shares of Common Stock upon transfer
of the Series B Preferred Stock to third parties in a widely dispersed offering.




78




---



13. STOCKHOLDERS’
EQUITY AND REGULATORY CAPITAL (continued)




The Company allocated the proceeds of $21.1
million from the issuance of the Series B Preferred Stock and Warrants between
the two based on their relative fair values. The fair value allocated to the
warrant was $11.1 million. The Warrants will not impact earnings per share
during periods in which Bancorp has net losses attributable to common
shareholders since the effect would be anti-dilutive or during periods in which
the exercise price of the Warrants exceeds the average price of shares of
Bancorp’s Commons Stock.




Regulatory Capital. The Federal Reserve and Federal Deposit Insurance Corporation (“FDIC”)
have established minimum requirements for capital adequacy for bank holding
companies and nonmember banks. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Bancorp and the Bank must
meet specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off balance sheet items. The Federal Reserve and FDIC
risk based capital guidelines require banks and bank holding companies to have a
ratio of Tier 1 capital to total risk weighted assets of at least 4%, and a
ratio of total capital to total risk weighted assets of 8% or greater. In
addition, the leverage ratio of Tier 1 capital to total average assets less
intangibles is required to be at least 4%. Bancorp and its bank subsidiary’s
capital components, classification, risk weightings and other factors are also
subject to qualitative judgments by regulators. Failure to meet minimum capital
requirements can initiate certain action by regulators that, if undertaken,
could have a material effect on Bancorp’s financial statements.




On October 26, 2009, Bancorp announced that
the Bank had entered into a Stipulation and Consent with the FDIC and the Oregon
Department of Consumer and Business Services Division of Finance and Corporate
Securities (the “DFCS”), agreeing to the issuance of an Order to Cease and
Desist (the “Consent Order”) effective as of October 22, 2009. The Consent Order
requires that no later than December 31, 2009, and during the life of the
Consent Order, the Bank shall maintain: (a) a Tier 1 capital to total assets
leverage ratio (“Leverage ratio”) at least equal to or greater than 10%; and (b)
a ratio of qualifying total capital to risk-weighted assets (“Total risk-based
capital ratio”) at least equal to or greater than 12%. As of December 31, 2009,
the Bank satisfied both of the capital measures required under the Consent
Order.




The Bank’s year end 2009 regulatory capital
ratios improved significantly from December 31, 2008 as a result of Bancorp’s
$134.2 million capital contribution to the Bank following the October 2009
private capital raise. The total capital ratio at the Bank improved to 15.37% at
December 31, 2009, from 10.91% at December 31, 2008, while Bank Tier 1 capital
increased from 9.66% to 14.11% over the same period. As of December 31, 2009,
the Bank met the capital level requirements of well capitalized banks, which
include a minimum total risk-based capital ratio of 10%, a minimum Tier 1
risk-based capital ratio of 6%, and a minimum leverage ratio of 5%. However, the
Bank is not "well capitalized" for many regulatory purposes as long as the
Consent Order is in effect.




The following table presents the
capital measures of Bancorp and the Bank as of December 31, 2009 and 2008:




2009
            
            2008Amount
            
            Percent
            
            
            
            
            
            
            
            Amount
            
            PercentRequired For
            
            required for
            
            
            
            
            
            
            
            Required For
            
            required forMinimum
            
            Minimum
            
            
            
            
            
            
            
            Minimum
            
            Minimum(Dollars in thousands)
            
            
            
            
            
            
            
            Capital
            
            Capital
            
            
            
            
            
            
            
            Capital
            
            CapitalAmount
            
            Ratio
            
            Adequacy
            
            Adequacy
            
            Amount
            
            Ratio
            
            Adequacy
            
            AdequacyTier 1 risk-based
    capitalWest Coast Bancorp
            
            $
            147,153
            
            7.17
            %
            
            $
            82,047
            
            4
            %
            
            $
            236,601
            
            9.96
            %
            
            $
            95,015
            
            4
            %West Coast Bank
            
            
            289,236
            
            14.11
            %
            
            $
            81,894
            
            4
            %
            
            
            229,167
            
            9.66
            %
            
            
            94,911
            
            4
            %Total risk-based
capitalWest Coast Bancorp
            
            $
            187,359
            
            9.13
            %
            
            $
            164,094
            
            8
            %
            
            $
            266,296
            
            11.21
            %
            
            $
            190,030
            
            8
            %West Coast Bank
            
            
            315,027
            
            15.37
            %
            
            
            163,969
            
            8
            %
            
            
            258,830
            
            10.91
            %
            
            
            159,822
            
            8
            %Leverage ratioWest Coast Bancorp
            
            $
            147,153
            
            5.37
            %
            
            $
            109,635
            
            4
            %
            
            $
            236,601
            
            9.46
            %
            
            $
            100,046
            
            4
            %West Coast Bank
            
            
            289,236
            
            10.57
            %
            
            
            109,454
            
            4
            %
            
            
            229,167
            
            9.17
            %
            
            
            99,928
            
            4
            %


79




---



14. STOCK PLANS




At December 31, 2009, Bancorp maintained two
stock option plans—the 2002 Stock Incentive Plan (“2002 Plan”) and the 1999
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 2.1 million shares, of which
31,429 shares remained available for issuance as of December 31,
2009.




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
two to four year vesting period; however, certain grants have been made that
vested immediately, including grants to directors. 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:




2009
            
            
            
            
            2008
            
            
            
            
            2007Weighted
            
            
            
            
            Weighted
            
            
            
            
            Weighted2009 Common
            
            Avg. Ex.
            
            2008 Common
            
            Avg. Ex.
            
            2007 Common
            
            Avg. Ex.Shares
            
            Price
            
            Shares
            
            Price
            
            Shares
            
            PriceBalance, beginning of year
            1,407,515
            
            
            $
            16.41
            
            1,311,585
            
            
            $
            16.97
            
            1,470,036
            
            
            $
            16.61Granted
            421,900
            
            
            
            2.31
            
            178,000
            
            
            
            12.73
            
            11,900
            
            
            
            31.53Exercised
            -
            
            
            
            -
            
            (2,622
            )
            
            
            9.46
            
            (161,834
            )
            
            
            14.36Forfeited/expired
            (82,663
            )
            
            
            14.90
            
            (79,448
            )
            
            
            17.56
            
            (8,517
            )
            
            
            25.17Balance, end of year
            1,746,752
            
            
            $
            13.08
            
            1,407,515
            
            
            $
            16.41
            
            1,311,585
            
            
            $
            16.97Exercisable, end of year
            1,245,135
            
            
            
            
            
            1,150,201
            
            
            
            
            
            1,099,940


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
      Options2009
            
            2008
            
            2009
            
            2008
            
            2007Risk Free interest rates
            
            1.64
            %
            
            2.75
            %
            
            
            1.64
            %
            
            
            2.75%-3.52
            %
            
            
            4.44%-4.78
            %Expected dividend
            
            1.22
            %
            
            3.60
            %
            
            
            0%-1.22
            %
            
            
            3.60%-4.18
            %
            
            
            1.48%-1.66
            %Expected lives, in years
            
            4
            
            
            4
            
            
            
            4
            
            
            
            4
            
            
            
            4Expected volatility
            
            37
            %
            
            27
            %
            
            
            37
            %
            
            
            27
            %
            
            
            23
            %Fair value of options granted
            
            $       
      0.65
            
            
            $        2.20
            
            
            $
            0.65
            
            
            $
            2.20
            
            
            $
            6.80


As of December 31, 2009, outstanding
stock options consist of the following:




Options
            
            Weighted Avg.
            
            Weighted Avg.
            
            
            
            Weighted Avg.Exercise
      Price Range
            
            Outstanding
            
            Remaining
      Life
            
            Exercise
    Price
            
            Options
      Exercisable
            
            Exercise
      Price$
            2.31
            -
            $
            9.20
            
            473,185
            
            $
            8.29
            
            3.09
            
            122,535
            
            $
            5.339.55
            -
            
            12.75
            
            472,325
            
            
            3.46
            
            11.53
            
            357,183
            
            
            11.1512.77
            -
            
            20.64
            
            506,346
            
            
            3.63
            
            17.12
            
            506,346
            
            
            17.1221.07
            -
            
            34.13
            
            294,896
            
            
            5.35
            
            24.62
            
            259,071
            
            
            24.13Total
            
            
            
            
            1,746,752
            
            $
            5.14
            
            13.08
            
            1,245,135
            
            $
            15.71


80




---



14. 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 31,2009
            
            2008
            
            2007Intrinsic value of options exercised in
      the period
            $
            -
            
            $
            6
            
            $
            2,706Stock options fully vested and expected
      to vest:Number
            
            1,704,448
            
            
            1,375,273
            
            
            1,235,652Weighted average exercise price
            $
            13.08
            
            $
            16.10
            
            $
            16.85Aggregate intrinsic
      value
            $
            -
            
            $
            -
            
            $
            2,044Weighted average contractual term of options
            
            5.5 years
            
            
            4.7 years
            
            
            4.9 yearsStock options vested and currently
      exercisableNumber
            
            1,245,135
            
            
            1,150,201
            
            
            1,099,940Weighted average exercise price
            $
            15.71
            
            $
            16.09
            
            $
            15.47Aggregate intrinsic
      value
            $
            -
            
            $
            -
            
            $
            4,385Weighted average contractual term of options
            
            4.0 years
            
            
            3.9 years
            
            
            4.4
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, 2009, 2008 and 2007:




Weighted
            
            
            
            
            Weighted
            
            
            
            
            WeightedAverage
            
            
            
            
            Average
            
            
            
            
            AverageGrant
            
            
            
            
            Grant
            
            
            
            
            Grant2009 Restricted
            
            Date Fair
            
            2008 Restricted
            
            Date Fair
            
            2007 Restricted
            
            Date FairShares
            
            Value
            
            Shares
            
            Value
            
            Shares
            
            ValueBalance, beginning of year
            210,768
            
            
            $
            18.41
            
            148,317
            
            
            $
            27.97
            
            123,746
            
            
            $
            24.22Granted
            -
            
            
            
            -
            
            127,900
            
            
            
            11.48
            
            74,170
            
            
            
            31.68Vested
            (71,183
            )
            
            
            20.85
            
            (59,949
            )
            
            
            26.53
            
            (47,583
            )
            
            
            23.93Forfeited
            (2,905
            )
            
            
            22.44
            
            (5,500
            )
            
            
            26.26
            
            (2,016
            )
            
            
            30.09Balance, end of year
            136,680
            
            
            $
            17.06
            
            210,768
            
            
            $
            18.41
            
            148,317
            
            
            $
            27.97Weighted avg. remainingrecognition period
            1.29 years
            
            
            
            
            
            1.40 years
            
            
            
            
            
            1.34 years


The following table presents stock-based
compensation expense for employees and directors related to restricted stock and
stock options for the periods shown:




Twelve
      months ended December 31,(Dollars in thousands)
            
            2009
            
            2008
            
            2007Restricted stock expense
            
            $
            1,106
            
            $
            2,301
            
            $
            1,530Stock option expense
            
            
            414
            
            
            564
            
            
            500Total stock-based compensation expense
            
            $
            1,520
            
            $
            2,865
            
            $
            2,030Tax benefit recognized on share-based
      expense
            
            $
            578
            
            $
            1,089
            
            $
            771


The balance of unearned compensation related
to unvested restricted stock granted as of December 31, 2009 and 2008 was $1.2
million and $2.2 million, respectively. The December 31, 2009 unearned
compensation balance is expected to be recognized over a weighted average period
of 1.3 years. There was no cash received from stock option exercises for the
twelve months ended December 31, 2009 and 2008, respectively. The Company had no
tax benefits from disqualifying dispositions involving incentive stock options,
the exercise of non-qualified stock options, and the vesting and release of
restricted stock for the twelve months ended December 31, 2009 and
2008.




81




---



15. 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 31,2009
            
            2008
            
            2007Net income (loss) as reported
            $
            (91,213
            )
            
            $
            (6,313
            )
            
            $
            16,842Unrealized holding gains (losses) on
      securities:Unrealized holding gains (losses) arising during the year
            
            4,082
            
            
            
            (7,480
            )
            
            
            (291
            )Tax (provision) benefit
            
            (1,538
            )
            
            
            2,891
            
            
            
            114Unrealized holding gains (losses) arising during the year, net of
      tax
            
            2,544
            
            
            
            (4,589
            )
            
            
            (177
            )Unrealized (losses) gains on
      derivatives- cash flow hedges
            
            -
            
            
            
            -
            
            
            
            28Tax benefit (provision)
            
            -
            
            
            
            -
            
            
            
            (11
            )Unrealized (losses) gains on
      derivatives- cash flow hedges, net of tax
            
            -
            
            
            
            -
            
            
            
            17Less: Reclassification adjustment for
      impairment and(gains) losses on sales of securities
            
            (641
            )
            
            
            5,558
            
            
            
            67Tax provision (benefit)
            
            246
            
            
            
            (2,136
            )
            
            
            (26
            )Net realized (gains) losses, net of
      tax
            
            (395
            )
            
            
            3,422
            
            
            
            41Total comprehensive income
    (loss)
            $
            (89,064
            )
            
            $
            (7,480
            )
            
            $
            16,723


16. EARNINGS (LOSS)
PER SHARE




The following tables reconcile the numerator
and denominator of the basic and diluted earnings (loss) per share computations:




(Dollars and shares in thousands, except per share
    amounts)December 31,
      2009
            
            December 31,
      2008
            
            December 31,
      2007Net earnings (loss)
            $
            (91,213
            )
            
            $
            (6,313
            )
            
            $
            16,842Net earnings (loss) allocated to participating restricted
      stock
            
            (728
            )
            
            
            (44
            )
            
            
            148Net earnings (loss) available to common
      stock holders
            $
            (90,485
            )
            
            $
            (6,269
            )
            
            $
            16,694Weighted average common shares
      outstanding -basic
            
            15,510
            
            
            
            15,472
            
            
            
            15,507Common stock equivalents from:Stock options
            
            -
            
            
            
            -
            
            
            
            497Restricted stock
            
            -
            
            
            
            -
            
            
            
            41Weighted average common shares
      outstanding -diluted
            
            15,510
            
            
            
            15,472
            
            
            
            16,045Basic earnings (loss) per
share
            $
            (5.83
            )
            
            $
            (0.41
            )
            
            $
            1.08Diluted earnings (loss) per share
            $
            (5.83
            )
            
            $
            (0.41
            )
            
            $
            1.04Stock option and restricted shares
      excluded due to anti-dilutive effect
            
            1,883
            
            
            
            60
            
            
            
            145


82




---



17. INCOME TAXES




The components of the (benefit) provision for
income taxes for the last three years were:




(Dollars in thousands)
            Year ended
      December 31,2009
            
            2008
            
            2007CurrentFederal
            $
            (24,220
            )
            
            $
            (9,717
            )
            
            $
            17,401State
            
            (6,982
            )
            
            
            (1,692
            )
            
            
            2,599(31,202
            )
            
            
            (11,409
            )
            
            
            20,000DeferredFederal
            
            10,335
            
            
            
            3,302
            
            
            
            (11,143
            )State
            
            1,591
            
            
            
            509
            
            
            
            (1,736
            )11,926
            
            
            
            3,811
            
            
            
            (12,879
            )TotalFederal
            
            (13,885
            )
            
            
            (6,415
            )
            
            
            6,258State
            
            (5,391
            )
            
            
            (1,183
            )
            
            
            863Total (benefit) provision for income taxes
            $
            (19,276
            )
            
            $
            (7,598
            )
            
            $
            7,121


The deferred Federal and State tax expense
includes a deferred tax asset valuation allowance of $21.0 million for the year
ended December 31, 2009.




The reconciliation between the
Company’s effective tax rate on income (loss) and the statutory rate is as
follows:




(Dollars in thousands)
            Year ended December
      31,2009
            
            2008
            
            2007Expected federal income tax (benefit)
      provision 1
            $
            (38,671
            )
            
            $
            (4,730
            )
            
            $
            8,387State income tax, net of federal income tax effect
            
            (3,504
            )
            
            
            (769
            )
            
            
            561Interest on obligations of state and
      political subdivisionsexempt from federal tax
            
            (1,148
            )
            
            
            (1,302
            )
            
            
            (1,247
            )Federal low income housing tax credits
            
            (972
            )
            
            
            (880
            )
            
            
            (598
            )Bank owned life insurance
            
            (307
            )
            
            
            (309
            )
            
            
            (303
            )Stock options
            
            123
            
            
            
            177
            
            
            
            149Goodwill impairment
            
            4,570
            
            
            
            -
            
            
            
            -Change in deferred tax asset valuation allowance
            
            20,999
            
            
            
            -
            
            
            
            -Other, net
            
            (366
            )
            
            
            215
            
            
            
            172Total (benefit) provision for
      income taxes
            $
            (19,276
            )
            
            $
            (7,598
            )
            
            $
            7,121


1
            
            Federal income tax provision applied at
      34% in 2008 and 35% in all other periods.




The Company has recorded income tax
net operating loss and tax credit carryforwards related to state tax losses in
2008 and 2009, as well as state and federal tax credits that cannot be used
against current or prior period federal and state income. The amount of deferred
tax assets related to state net operating loss carryforwards is $3.6 million at
December 31, 2009. State and federal tax credit carryforwards are $1.5 million
at December 31, 2009. The following table summarizes the expiration dates of
state loss and tax credit carryforwards:




(Dollars in thousands)Year of
      expiration
            
            Type
            
            Amount2023-2024
            
            State net operating losses
            
            $
            3,6302016-2017
            
            State tax credits- business energy
            
            
            4362013-2014
            
            State tax credits- low income
      housing
            
            
            412029
            
            Federal tax credits- low income housing
            
            
            972


The Company had no net operating loss
carryforwards related to federal income taxes at December 31, 2009 as recently
implemented tax legislation was passed which increased the tax loss carryback
period from two years to five years. This enabled the Company to carry back its
entire 2009 loss against prior period taxable income; therefore, no net
operating loss carryforward for federal income taxes was recorded.




83




---



17. 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 components of deferred tax assets and deferred tax
liabilities as of December 31, 2009 and 2008 are presented below:




(Dollars in thousands)
            December
      31,2009
            
            2008Deferred tax assets:Allowance for loan losses
            $
            14,792
            
            
            $
            11,114Reserve for unfunded
    commitments
            
            357
            
            
            
            390Net unrealized loss on investmentsavailable for sale
            
            952
            
            
            
            1,035Deferred employee benefits
            
            1,484
            
            
            
            1,356Loss on impairment of securities
            
            -
            
            
            
            2,840Stock option and restricted
    stock
            
            682
            
            
            
            796Valuation allowance on OREO
            
            3,647
            
            
            
            1,506Capitalized OREO expenses
            
            889
            
            
            
            629State net operating loss carryforwards
            
            3,630
            
            
            
            -State business energy and low income
      housing tax credits
            
            477
            
            
            
            -Federal low income housing tax credits
            
            972
            
            
            
            -Deferred tax asset valuation
      allowance
            
            (20,999
            )
            
            
            -Other
            
            1,041
            
            
            
            1,173Total deferred tax assets
            
            7,924
            
            
            
            20,839Deferred tax liabilities:Accumulated depreciation
            
            582
            
            
            
            1,033Loan origination costs
            
            1,807
            
            
            
            2,108Federal Home Loan Bank stock dividends
            
            1,893
            
            
            
            1,893Intangible assets
            
            193
            
            
            
            310Other
            
            200
            
            
            
            237Total deferred tax liabilities
            
            4,675
            
            
            
            5,581Net deferred tax
    assets
            $
            3,249
            
            
            $
            15,258


The Company assesses the available positive
and negative evidence to estimate if sufficient future taxable income will be
generated to utilize the existing deferred tax assets. The Company’s accounting
policy is to exclude deferred tax assets related to unrealized losses on its
available for sale debt securities debt as these losses are expected to reverse
and realization of the related deferred tax asset is not dependent on future
taxable income. A significant piece of objective negative evidence evaluated was
the cumulative loss incurred over the three year period ended December 31, 2009.
Such objective evidence limits the ability to consider other subjective evidence
such as our projections for future growth. Based on this evaluation, as of
December 31, 2009, a deferred tax asset valuation allowance of $21.0 million has
been recorded in order to measure only the portion of the deferred tax assets
that more likely than not will be realized. The amount of net deferred tax asset
considered more likely than not to be realized is $3.2 million after
consideration of the accounting policy discussed above and available tax
strategies. The amount of the deferred tax asset considered realizable, however,
could be adjusted if estimates of future taxable income during the carryforward
period are reduced or if objective negative evidence in the form of cumulative
losses is no longer present and additional weight may be given to subjective
evidence such as our projections for taxable income.




Bancorp is subject to U.S. federal income tax
and income tax of the State of Oregon. The years 2006 through 2008 remain open
to examination for federal income taxes, and years 2005 through 2008 remain open
for State examination. As of December 31, 2009 and 2008, Bancorp had no
unrecognized tax benefits or uncertain tax positions. In addition, Bancorp had
no accrued interest or penalties as of January 1, 2009 or December 31, 2009. It
is Bancorp’s policy to record interest and penalties as a component of income
tax expense.




18. TIME DEPOSITS




Included in time deposits are deposits in
denominations of $100,000 or greater, totaling $211.1 million and $290.0 million
at December 31, 2009 and 2008, respectively. Interest expense relating to time
deposits in denominations of $100,000 or greater was $5.9 million, $10.5
million, and $14.0 million for the years ended December 31, 2009, 2008 and 2007,
respectively. Maturity amounts on Bancorp’s time deposits include $384.1 million
in 2010, $113.3 million in 2011, $21.2 million in 2012, $2.1 million in 2013,
and $3.8 million in 2014. Included in the maturity amounts are $1.7 million in
variable rate time deposits that reprice monthly with maturities in the first
quarter of 2010.




84




---



19. FAIR VALUE
MEASUREMENT




The tables below present fair value
information on certain assets broken down by recurring or nonrecurring
measurement status. Recurring assets are initially measured at fair value and
are required to be reflected at fair value in the financial statements at each
reporting date. Assets measured on a nonrecurring basis are assets that due to
an event or circumstance were required to be remeasured at fair value after
initial recognition in the financial statements at some time during the
reporting period.




Assets are classified as level 1-3 based on
the lowest level of input that has a significant effect on fair value. The
following definitions describe the level 1-3 categories for inputs used in the
tables presented below.


- Quoted prices in active markets
  for identical assets (Level 1): Inputs that are quoted unadjusted prices in
  active markets for identical assets that the Company has the ability to access
  at the measurement date. An active market for the asset is a market in which
  transactions for the asset or liability occur with sufficient frequency and
  volume to provide pricing information on an ongoing basis.
- Other observable inputs (Level 2):
  Inputs that reflect the assumptions market participants would use in pricing
  the asset or liability developed based on market data obtained from sources
  independent of the reporting entity including quoted prices for similar
  assets, quoted prices for securities in inactive markets and inputs derived
  principally from or corroborated by observable market data by correlation or
  other means.
- Significant unobservable inputs
  (Level 3): Inputs that reflect the reporting entity's own assumptions about
  the assumptions market participants would use in pricing the asset or
  liability developed based on the best information available in the
  circumstances.

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, 2009, usingQuoted prices in active
            
            Other observable
            
            SignificantTotal fair value
            
            markets for identical assets
            
            inputs
            
            unobservable inputs(Dollars in thousands)
            December 31,
      2009
            
            (Level
      1)
            
            (Level
      2)
            
            (Level
      3)Trading securities
            $
            731
            
            $
            731
            
            $
            -
            
            $
            -Available for sale securities:U.S. Treasury securities
            
            25,007
            
            
            25,007
            
            
            -
            
            
            -U.S. Government agency
      securities
            
            103,988
            
            
            -
            
            
            103,988
            
            
            -Corporate securities
            
            9,753
            
            
            -
            
            
            -
            
            
            9,753Mortgage-backed
      securities
            
            344,294
            
            
            -
            
            
            344,294
            
            
            -Obligations of state and political subdivisions
            
            70,018
            
            
            -
            
            
            69,045
            
            
            973Equity investments and other
      securities
            
            9,217
            
            
            1
            
            
            9,216
            
            
            -Total recurring assets measured at fair
      value
            $
            563,008
            
            $
            25,739
            
            $
            526,543
            
            $
            10,726Fair value
      measurements at December 31, 2008, usingQuoted prices in active
            
            Other observable
            
            SignificantTotal fair value
            
            markets for identical assets
            
            inputs
            
            unobservable inputs(Dollars in thousands)
            December 31,
      2008
            
            (Level
      1)
            
            (Level
      2)
            
            (Level
      3)Trading securities
            $
            1,546
            
            $
            1,546
            
            $
            -
            
            $
            -Available for sale securities:U.S. Treasury securities
            
            223
            
            
            223
            
            
            -
            
            
            -U.S. Government agency
      securities
            
            7,387
            
            
            -
            
            
            7,387
            
            
            -Corporate securities
            
            10,877
            
            
            -
            
            
            1,357
            
            
            9,520Mortgage-backed
      securities
            
            92,566
            
            
            -
            
            
            92,566
            
            
            -Obligations of state and political subdivisions
            
            82,398
            
            
            -
            
            
            82,398
            
            
            -Equity investments and other
      securities
            
            5,064
            
            
            -
            
            
            5,064
            
            
            -Total recurring assets measured at fair
      value
            $
            200,061
            
            $
            1,769
            
            $
            188,772
            
            $
            9,520


85




---



19. FAIR VALUE
MEASUREMENT (continued)




The Company did not have any transfers between
level 1, level 2, or level 3 instruments during the year ended December 31,
2009. In addition, the Company had no material changes in valuation techniques
for recurring and nonrecurring assets measured at fair value from the year ended
December 31, 2008.




The following table represents a
reconciliation of level 3 instruments for assets that are measured at fair value
on a recurring basis for the full year 2009 and 2008:




Twelve months ended December 31,
      2009Gains (loss)
            
            Reclassification ofincluded in other
            
            losses from adjustment
            
            
            
            
            BalanceBalance January
            
            comprehensive
            
            for impairment of
            
            Purchases, Issuances,
            
            December 31,(Dollars in thousands)
            1,
    2009
            
            income
      (loss)
            
            securities
            
            and
      Settlements
            
            2009Corporate securities
            $
            9,520
            
            $
            165
            
            
            $
            68
            
            $
            -
            
            $
            9,753Obligations of state and politicalsubdivisions
            
            -
            
            
            (31
            )
            
            
            -
            
            
            1,004
            
            
            973Fair value
            $
            9,520
            
            $
            134
            
            
            $
            68
            
            $
            1,004
            
            $
            10,726Twelve months ended December 31,
      2008Gains (loss)
            
            Reclassification ofincluded in other
            
            losses from adjustment
            
            
            
            
            BalanceBalance January
            
            comprehensive
            
            for impairment of
            
            Purchases, Issuances,
            
            December 31,(Dollars in thousands)
            1,
    2008
            
            income
      (loss)
            
            securities
            
            and
      Settlements
            
            2008Corporate securities
            $
            13,948
            
            $
            (7,572
            )
            
            $
            3,144
            
            $
            -
            
            $
            9,520Fair value
            $
            13,948
            
            $
            (7,572
            )
            
            $
            3,144
            
            $
            -
            
            $
            9,520


The losses from adjustments for OTTI of
securities were recognized in noninterest income in the consolidated income
statement.




The following method was used to
estimate the fair value of each class of financial instrument:




Trading securities  – Trading securities held at
December 31, 2009, 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 securities 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. When quoted
market prices are not readily accessible or available, the use of alternative
approaches such as matrix or model pricing or indicators from market makers is
used. Our level 3 assets consist of pooled trust preferred securities and
auction rate securities. The fair values of these securities were estimated
using the discounted cash flow method. The fair value for these securities used
inputs for base case default, recovery and prepayment rates to estimate the
probable cash flows for the security. The estimated cash flows were discounted
using a rate for comparably rated securities adjusted for an additional
liquidity premium.




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. For the twelve months ended
December 31, 2009, 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 2009. For the twelve months ended December 31, 2009,
certain loans included in Bancorp’s loan portfolio were deemed impaired. OREO
that was taken into possession during 2009 was measured at estimated fair value
less sales expense. In addition, during 2009, certain properties were written
down $18.6 million to reflect additional decreases in their fair market value
after initial recognition at the time the property was placed into
OREO.




86




---



19. FAIR VALUE
MEASUREMENT (continued)




There were no nonrecurring level 1 or 2 fair
value measurements in 2009 or 2008. The following table represents the level 3
fair value measurements for nonrecurring assets for the periods
presented:




Twelve months ended December 31,
      2009(Dollars in
      thousands)
            
            Impairment
            
            Fair Value
      (1)Loans measured for impairment
            
            $
            82,345
            
            $
            212,311OREO
            
            
            18,562
            
            
            162,153Goodwill
            
            
            13,059
            
            
            -Total nonrecurring assets measured at fair value
            
            $
            113,966
            
            $
            374,464


(1)
            
            Fair value excludes costs to sell
      collateral.


Twelve months ended December 31,
      2008(Dollars in thousands)
            
            Impairment
            
            Fair
      ValueLoans measured for impairment
            
            $
            56,563
            
            $
            221,197OREO
            
            
            4,785
            
            
            65,492Total nonrecurring assets measured at
      fair value
            
            $
            61,348
            
            $
            286,689


The following methods were used to
estimate the fair value of each class of financial instrument above:




Impaired loans  - A loan is
considered to be impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due (both
interest and principal) according to the contractual terms of the loan
agreement. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan’s effective interest rate or, as a
practical expedient, at the loan’s observable market price or the fair market
value of the collateral. A significant portion of the Bank's impaired loans are
measured using the fair market value of the collateral.




Other real estate owned  -
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
periodically reviews OREO to determine whether the property continues to be
carried at the lower of its recorded book value or fair value. The fair values
for OREO in the table above reflect only the fair value of the properties and
exclude any estimated costs to sell.




Goodwill  - Refer to Note 5
for discussion of method used to estimate the fair value of goodwill and the
related impairment charge taken in the first quarter of 2009.




87




---



20. 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
substantially all securities within the following categories U.S. Treasuries,
U.S. Government agencies, mortgage-backed, obligations of state and political
subdivisions, and equity investments and other securities held for investment
purposes fair values are based on quoted market prices or dealer quotes if
available. If a quoted market price is not available due to illiquidity, fair
value is estimated using quoted market prices for similar securities or other
modeling techniques. If neither a quoted market price nor market prices for
similar securities are available, fair value is estimated by discounting
expected cash flows using a market derived discount rate as of the valuation
date. See Note 19, “Fair Value Measurement” of the notes to consolidated
financial statements for more detail.




For the pooled trust preferred securities
within our corporate securities portfolio held for investment purposes and our
auction rate securities within our obligations of state and political
subdivisions portfolio, we have concluded that valuations from the available
quoted market prices appear to be distressed transactions. The inactivity for
our pooled trust preferred securities and auction rate securities is evidenced
by the sustained wide bid-ask spread in the brokered markets in which pooled
trust preferred securities and auction rate securities trade, and a significant
decrease in the volume of trades relative to historical levels. We believe
available quotes incorporate illiquidity and “fear” discounts beyond what cash
flow projections indicate. The fair value for these securities used inputs for
base case default, recovery and prepayment rates to estimate the probable cash
flows for the security. The estimated cash flows were discounted using a rate
for comparably rated securities adjusted for an additional liquidity
premium.




Loans - The fair
value of loans is estimated by discounting the future cash flows using the
current rate at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. An additional liquidity
discount is also incorporated to more closely align the fair value with observed
market prices.




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.




88




---



20. FAIR VALUES OF
FINANCIAL INSTRUMENTS (continued)




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 the Bank, they only have value to the borrower and the
Bank.




The estimated fair values of
financial instruments at December 31, 2009, are as follows:




(Dollars in thousands)
            
            Carrying
      Value
            
            Fair
      ValueFINANCIAL ASSETS:Cash and cash equivalents
            
            $
            303,097
            
            $
            303,097Trading securities
            
            
            731
            
            
            731Investment securities available for sale
            
            
            567,277
            
            
            567,277Federal Home Loan Bank stock
            
            
            12,148
            
            
            12,148Net loans (net of allowance for loan lossesand including loans held for
    sale)
            
            
            1,687,528
            
            
            1,575,033Bank owned life insurance
            
            
            24,417
            
            
            24,417FINANCIAL LIABILITIES:Deposits
            
            $
            2,146,884
            
            $
            2,151,850Short-term borrowings
            
            
            12,600
            
            
            12,600Long-term borrowings
            
            
            250,699
            
            
            256,841Junior subordinated
      debentures-variable
            
            
            51,000
            
            
            17,850


The estimated fair values of
financial instruments at December 31, 2008 are as follows:




(Dollars in thousands)
            
            Carrying
      Value
            
            Fair
      ValueFINANCIAL
      ASSETS:Cash and cash equivalents
            
            $
            64,778
            
            $
            64,778Trading securities
            
            
            1,546
            
            
            1,546Investment securities available for sale
            
            
            198,515
            
            
            198,515Federal Home Loan Bank stock
            
            
            10,843
            
            
            10,843Net loans (net of allowance for loan lossesand including loans held
      for sale)
            
            
            2,038,736
            
            
            1,915,769Bank owned life insurance
            
            
            23,525
            
            
            23,525FINANCIAL LIABILITIES:Deposits
            
            $
            2,024,379
            
            $
            2,030,079Short-term borrowings
            
            
            132,000
            
            
            132,000Long-term borrowings
            
            
            91,059
            
            
            94,049Junior subordinated
      debentures-variable
            
            
            45,000
            
            
            23,921Junior subordinated debentures-fixed
            
            
            6,000
            
            
            4,041


89




---



21. 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, 2009, outstanding commitments consist of
the following:




Contract or
            
            Contract orNotional Amount
            
            Notional Amount(Dollars in thousands)
            
            December 31,
      2009
            
            December 31,
      2008Financial instruments whose contract
      amounts represent credit risk:Commitments to extend credit in the form of loansCommercial
            
            $
            260,934
            
            $
            348,428Real estate
      constructionTwo-step
      loans
            
            
            -
            
            
            152Other
      than two-step loans
            
            
            15,044
            
            
            52,845Total real estate
      construction
            
            
            15,044
            
            
            52,997Real estate
      mortgageMortgage
            
            
            4,063
            
            
            2,251Home
      equity line of credit
            
            
            164,638
            
            
            190,122Total real estate mortgage
      loans
            
            
            168,701
            
            
            192,373Commercial real
      estate
            
            
            10,832
            
            
            18,916Installment and
    consumer
            
            
            12,147
            
            
            15,779Other1
            
            
            10,363
            
            
            8,251Standby letters of credit and financial
      guarantees
            
            
            9,491
            
            
            14,030Account overdraft protection instruments
            
            
            76,919
            
            
            59,175Total
            
            $
            564,431
            
            $
            709,949


1
            
            The category
      “other” represents commitments extended to clients or borrowers that have
      been extended but not yet fully executed. These extended commitments are
      not yet classified nor have they been placed into our loan
      system.


Commitments to extend credit are agreements to
lend to a customer, as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Many of the
commitments may expire without being drawn upon; therefore total commitment
amounts do not necessarily represent future cash requirements. Each customer’s
creditworthiness is evaluated on a case-by-case basis. The amount of collateral
obtained, if deemed necessary upon extension of credit, is based on the Bank’s
credit evaluation of the customer. Collateral held varies, but may include real
property, accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.




Standby letters of credit are conditional
commitments issued to support a customer’s performance or payment obligation to
a third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.




Interest rates on residential 1-4 family
mortgage loan applications are typically rate locked during the application
stage for periods ranging from 15 to 45 days, the most typical period being 30
days. These loans are locked with various qualified investors under a
best-efforts delivery program. The Company makes every effort to deliver these
loans before their rate locks expire. This arrangement generally requires the
Bank to deliver the loans prior to the expiration of the rate lock. Delays in
funding the loans may require a lock extension. The cost of a lock extension at
times is borne by the borrower and at times by the Bank. These lock extension
costs paid by the Bank are not expected to have a material impact on operations.
This activity is managed daily.




90




---



22. 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)
            
            2009
            
            2008Assets:Cash
      and cash equivalents
            
            $
            10,965
            
            $
            2,031Investment
      in bank subsidiary
            
            
            289,883
            
            
            241,701Investment
      in other subsidiaries
            
            
            3,036
            
            
            4,152Other
      assets
            
            
            1,884
            
            
            3,948Total assets
            
            $
            305,768
            
            $
            251,832Liabilities and stockholders’
      equity:Junior
      subordinated debentures
            
            $
            51,000
            
            $
            51,000Other
      liabilities
            
            
            5,710
            
            
            2,645Total
    liabilities
            
            
            56,710
            
            
            53,645Stockholders’ equity
            
            
            249,058
            
            
            198,187Total liabilities and
      stockholders’ equity
            
            $
            305,768
            
            $
            251,832


WEST COAST
BANCORP  UNCONSOLIDATED
STATEMENTS OF INCOME (LOSS)




Year ended December 31
      (Dollars in thousands)
            
            2009
            
            2008
            
            2007Income:Cash dividends from Bank
            
            $
            -
            
            
            $
            6,000
            
            
            $
            7,000Other
    income
            
            
            10
            
            
            
            10
            
            
            
            10Total
      income
            
            
            10
            
            
            
            6,010
            
            
            
            7,010Expenses:Interest
      expense
            
            
            1,483
            
            
            
            2,635
            
            
            
            3,612Other
      expense
            
            
            905
            
            
            
            869
            
            
            
            699Total
      expense
            
            
            2,388
            
            
            
            3,504
            
            
            
            4,311Income (loss) before income taxes and
      equity inundistributed
      earnings (loss) of the subsidiaries
            
            
            (2,378
            )
            
            
            2,506
            
            
            
            2,698Income tax benefit
            
            
            927
            
            
            
            1,363
            
            
            
            1,678Net income (loss) before equity in
      undistributedearnings (loss) of
      the subsidiaries
            
            
            (1,451
            )
            
            
            3,869
            
            
            
            4,376Equity in undistributed earnings (loss) of the
    subsidiaries
            
            
            (89,762
            )
            
            
            (10,182
            )
            
            
            12,466Net
      income (loss)
            
            $
            (91,213
            )
            
            $
            (6,313
            )
            
            $
            16,842


91




---



22. PARENT COMPANY
ONLY FINANCIAL DATA (continued)




WEST COAST
BANCORP  UNCONSOLIDATED
STATEMENTS OF CASH FLOWS




Year ended December 31
      (Dollars in thousands)
            
            2009
            
            2008
            
            2007CASH FLOWS FROM OPERATING
      ACTIVITIES:Net income (loss)
            
            $
            (91,213
            )
            
            $
            (6,313
            )
            
            $
            16,842Adjustments to reconcile net income to
      net cashprovided by operating
    activities:Undistributed
      (earnings) loss of subsidiaries
            
            
            89,762
            
            
            
            10,182
            
            
            
            (12,466
            )(Increase)
      decrease in other assets
            
            
            1,633
            
            
            
            (1,805
            )
            
            
            (2,295
            )Increase in other
      liabilities
            
            
            3,222
            
            
            
            5
            
            
            
            415Excess tax
      deficiency associated with stock plans
            
            
            (496
            )
            
            
            -
            
            
            
            -Stock
      based compensation expense
            
            
            1,520
            
            
            
            2,865
            
            
            
            2,030Net
      cash provided by operating activities
            
            
            4,428
            
            
            
            4,934
            
            
            
            4,526CASH FLOWS FROM INVESTING
      ACTIVITIES:Capital
      contribution to subsidiaries
            
            
            (134,248
            )
            
            
            -
            
            
            
            (5,000
            )Net
      cash used in investing activities
            
            
            (134,248
            )
            
            
            -
            
            
            
            (5,000
            )CASH FLOWS FROM FINANCING
      ACTIVITIES:Proceeds from
      issuance of junior subordinated debentures, net of costs
            
            
            -
            
            
            
            -
            
            
            
            17,500Repayment of
      junior subordinated debentures
            
            
            -
            
            
            
            -
            
            
            
            (7,500
            )Activity in
      deferred compensation plan
            
            
            (1
            )
            
            
            (50
            )
            
            
            (84
            )Proceeds from
      issuance of common stock
            
            
            -
            
            
            
            25
            
            
            
            2,325Redemption of
      stock pursuant to stock plans
            
            
            (22
            )
            
            
            (190
            )
            
            
            (639
            )Tax adjustment
      associated with stock plans
            
            
            -
            
            
            
            (287
            )
            
            
            853Repurchase of
      common stock
            
            
            -
            
            
            
            -
            
            
            
            (5,847
            )Proceeds from
      issuance of preferred stock, net of costs
            
            
            139,248
            
            
            
            -
            
            
            
            -Cash
      dividends paid
            
            
            (471
            )
            
            
            (6,503
            )
            
            
            (7,765
            )Other,
    net
            
            
            -
            
            
            
            -
            
            
            
            17Net
      cash provided by (used in) financing activities
            
            
            138,754
            
            
            
            (7,005
            )
            
            
            (1,140
            )Net increase (decrease) in cash and cash
      equivalents
            
            
            8,934
            
            
            
            (2,071
            )
            
            
            (1,614
            )Cash and cash equivalents at beginning of year
            
            
            2,031
            
            
            
            4,102
            
            
            
            5,716Cash and cash equivalents at end of
      year
            
            $
            10,965
            
            
            $
            2,031
            
            
            $
            4,102


During the years ended December 31, 2009 and
2008, the Parent Company made non-cash capital contributions of $.43 million and
$9.83 million, respectively, to the Bank in the form of an intercompany tax
settlement.




92




---



23. 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, 2009Banking
            
            Other
            
            Intercompany
            
            ConsolidatedInterest income
            
            $
            112,068
            
            
            $
            82
            
            
            $
            -
            
            
            $
            112,150Interest expense
            
            
            31,941
            
            
            
            1,482
            
            
            
            -
            
            
            
            33,423Net interest income
      (expense)
            
            
            80,127
            
            
            
            (1,400
            )
            
            
            -
            
            
            
            78,727Provision for credit losses
            
            
            90,057
            
            
            
            -
            
            
            
            -
            
            
            
            90,057Noninterest income
            
            
            7,208
            
            
            
            3,032
            
            
            
            (1,111
            )
            
            
            9,129Noninterest expense
            
            
            105,917
            
            
            
            3,482
            
            
            
            (1,111
            )
            
            
            108,288Loss before income
      taxes
            
            
            (108,639
            )
            
            
            (1,850
            )
            
            
            -
            
            
            
            (110,489
            )Benefit for income taxes
            
            
            (18,555
            )
            
            
            (721
            )
            
            
            -
            
            
            
            (19,276
            )Net loss
            
            $
            (90,084
            )
            
            $
            (1,129
            )
            
            $
            -
            
            
            $
            (91,213
            )Depreciation, amortization and
      accretion
            
            $
            8,253
            
            
            $
            28
            
            
            $
            -
            
            
            $
            8,281Assets
            
            $
            2,729,453
            
            
            $
            17,370
            
            
            $
            (13,276
            )
            
            $
            2,733,547Goodwill
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Loans, net
            
            $
            1,686,352
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,686,352Deposits
            
            $
            2,159,342
            
            
            $
            -
            
            
            $
            (12,458
            )
            
            $
            2,146,884Equity
            
            $
            288,477
            
            
            $
            (39,419
            )
            
            $
            -
            
            
            $
            249,058


As of and for the year
ended(Dollars in thousands)
            
            December
      31, 2008Banking
            
            Other
            
            Intercompany
            
            ConsolidatedInterest income
            
            $
            140,767
            
            
            $
            79
            
            
            $
            -
            
            
            $
            140,846Interest expense
            
            
            46,061
            
            
            
            2,635
            
            
            
            -
            
            
            
            48,696Net interest income (expense)
            
            
            94,706
            
            
            
            (2,556
            )
            
            
            -
            
            
            
            92,150Provision for credit losses
            
            
            40,367
            
            
            
            -
            
            
            
            -
            
            
            
            40,367Noninterest income
            
            
            22,429
            
            
            
            3,329
            
            
            
            (1,129
            )
            
            
            24,629Noninterest expense
            
            
            87,836
            
            
            
            3,616
            
            
            
            (1,129
            )
            
            
            90,323Loss 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, amortization and
      accretion
            
            $
            4,493
            
            
            $
            27
            
            
            $
            -
            
            
            $
            4,520Assets
            
            $
            2,511,006
            
            
            $
            9,470
            
            
            $
            (4,336
            )
            
            $
            2,516,140Goodwill
            
            $
            13,059
            
            
            $
            -
            
            
            $
            -
            
            
            $
            13,059Loans, net
            
            $
            2,035,876
            
            
            $
            -
            
            
            $
            -
            
            
            $
            2,035,876Deposits
            
            $
            2,027,899
            
            
            $
            -
            
            
            $
            (3,520
            )
            
            $
            2,024,379Equity
            
            $
            241,701
            
            
            $
            (43,514
            )
            
            $
            -
            
            
            $
            198,187


93




---



23. SEGMENT AND
RELATED INFORMATION (continued)




As of and for the year
ended(Dollars in thousands)
            
            December
      31, 2007Banking
            
            Other
            
            Intercompany
            
            ConsolidatedInterest income
            
            $
            183,067
            
            
            $
            123
            
            
            $
            -
            
            
            $
            183,190Interest expense
            
            
            64,857
            
            
            
            3,613
            
            
            
            -
            
            
            
            68,470Net interest income (expense)
            
            
            118,210
            
            
            
            (3,490
            )
            
            
            -
            
            
            
            114,720Provision for credit losses
            
            
            38,956
            
            
            
            -
            
            
            
            -
            
            
            
            38,956Noninterest income
            
            
            30,724
            
            
            
            3,721
            
            
            
            (947
            )
            
            
            33,498Noninterest expense
            
            
            82,466
            
            
            
            3,780
            
            
            
            (947
            )
            
            
            85,299Income (loss)
      before income taxes
            
            
            27,512
            
            
            
            (3,549
            )
            
            
            -
            
            
            
            23,963Provision (benefit) for income taxes
            
            
            8,505
            
            
            
            (1,384
            )
            
            
            -
            
            
            
            7,121Net income
      (loss)
            
            $
            19,007
            
            
            $
            (2,165
            )
            
            $
            -
            
            
            $
            16,842Depreciation, amortization and
      accretion
            
            $
            4,719
            
            
            $
            28
            
            
            $
            -
            
            
            $
            4,747Assets
            
            $
            2,641,630
            
            
            $
            10,937
            
            
            $
            (5,953
            )
            
            $
            2,646,614Goodwill
            
            $
            13,059
            
            
            $
            -
            
            
            $
            -
            
            
            $
            13,059Loans, net
            
            $
            2,125,752
            
            
            $
            -
            
            
            $
            -
            
            
            $
            2,125,752Deposits
            
            $
            2,100,018
            
            
            $
            -
            
            
            $
            (5,186
            )
            
            $
            2,094,832Equity
            
            $
            244,047
            
            
            $
            (35,806
            )
            
            $
            -
            
            
            $
            208,241


24. RELATED PARTY
TRANSACTIONS




As of December 31, 2009 and 2008,
the Bank had loan commitments to directors, senior officers, principal
stockholders and their related interests totaling $6.3 million and $26.7
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 31,2009
            
            2008Balance, beginning of period
            
            $
            22,861
            
            
            $
            18,890New loans and advances
            
            
            1,199
            
            
            
            21,775Principal payments and payoffs
            
            
            (20,167
            )
            
            
            (17,804
            )Balance, end of period
            
            $
            3,893
            
            
            $
            22,861


94




---



25. QUARTERLY
FINANCIAL INFORMATION (unaudited)




2009(Dollars in thousands, except per share data)
            December
      31,
            
            September
      30,
            
            June
      30,
            
            March
      31,Interest income
            $
            26,948
            
            
            $
            27,725
            
            
            $
            28,869
            
            
            $
            28,608Interest expense
            
            7,710
            
            
            
            8,580
            
            
            
            8,655
            
            
            
            8,478Net interest income
            
            19,238
            
            
            
            19,145
            
            
            
            20,214
            
            
            
            20,130Provision for credit losses
            
            35,233
            
            
            
            20,300
            
            
            
            11,393
            
            
            
            23,131Noninterest income (loss)
            
            (6,148
            )
            
            
            4,971
            
            
            
            5,958
            
            
            
            4,348Noninterest expense
            
            24,181
            
            
            
            23,489
            
            
            
            25,244
            
            
            
            35,374Loss before income taxes
            
            (46,324
            )
            
            
            (19,673
            )
            
            
            (10,465
            )
            
            
            (34,027
            )Provision (benefit) for income taxes
            
            2,543
            
            
            
            (7,265
            )
            
            
            (4,126
            )
            
            
            (10,428
            )Net loss
            $
            (48,867
            )
            
            $
            (12,408
            )
            
            $
            (6,339
            )
            
            $
            (23,599
            )Loss per common share:Basic
            $
            (3.13
            )
            
            $
            (0.79
            )
            
            $
            (0.41
            )
            
            $
            (1.51
            )Diluted
            $
            (3.13
            )
            
            $
            (0.79
            )
            
            $
            (0.41
            )
            
            $
            (1.51
            )2008(Dollars in thousands, except per share data)
            December
      31,
            
            September
      30,
            
            June
      30,
            
            March
      31,Interest income
            $
            32,017
            
            
            $
            34,772
            
            
            $
            35,745
            
            
            $
            38,312Interest expense
            
            10,880
            
            
            
            11,049
            
            
            
            12,032
            
            
            
            14,735Net interest income
            
            21,137
            
            
            
            23,723
            
            
            
            23,713
            
            
            
            23,577Provision for credit losses
            
            16,517
            
            
            
            9,125
            
            
            
            6,000
            
            
            
            8,725Noninterest income
            
            4,310
            
            
            
            1,070
            
            
            
            9,038
            
            
            
            10,211Noninterest expense
            
            22,535
            
            
            
            22,221
            
            
            
            23,346
            
            
            
            22,221Income (loss) before income
    taxes
            
            (13,605
            )
            
            
            (6,553
            )
            
            
            3,405
            
            
            
            2,842Provision (benefit) for income taxes
            
            (4,924
            )
            
            
            (4,237
            )
            
            
            721
            
            
            
            842Net income (loss)
            $
            (8,681
            )
            
            $
            (2,316
            )
            
            $
            2,684
            
            
            $
            2,000Earnings (loss) per common
    share:Basic
            $
            (0.56
            )
            
            $
            (0.15
            )
            
            $
            0.17
            
            
            $
            0.13Diluted
            $
            (0.56
            )
            
            $
            (0.15
            )
            
            $
            0.17
            
            
            $
            0.13


26. SUBSEQUENT EVENTS




Shareholder approvals. On January 20, 2010,
shareholders approved two proposals. The first proposal was to approve the
amendment of the Company's Restated Articles of Incorporation to increase the
number of authorized shares of Common Stock to 250,000,000 (and,
correspondingly, to increase the total number of authorized shares of all
classes of stock from 60,000,000 to 260,000,000). The second proposal approved,
for purposes of NASDAQ Listing Rule 5635, the issuance of shares of Common Stock
in connection with the conversion of the Company's Series A Preferred Stock and
Series B Preferred Stock into Common Stock in accordance with the Preferred
Stock's terms. As a result of the shareholder approvals the Series A Preferred
Stock issued in the October 2009 private capital raise automatically converted
into 71,442,450 shares of Common Stock. The Series B Preferred Stock will
convert automatically to Common Stock following the transfer of the Series B
Preferred Stock to a third party in a widely dispersed offering.




Rights Offering. On
January 29, 2010, Bancorp announced the commencement of a $10.0 million rights
offering of up to 5.0 million shares of Common Stock. Pursuant to the terms of
the rights offering, the Company distributed to its common shareholders of
record on January 19, 2010, non-transferable rights to subscribe for and
purchase up to an aggregate of 5.0 million shares of its Common Stock (or
0.31787 subscription rights for each share of Common Stock owned) at a
subscription price of $2.00 per share. The rights offering also included an
over-subscription privilege pursuant to which each rights holder that exercised
the basic subscription privilege in full was entitled to purchase additional
shares of Common Stock that remained unsubscribed at the expiration of the
rights offering, subject to a pro rata allocation of shares among persons
exercising this over-subscription right if necessary.




The rights offering expired on March 1, 2010,
and was oversubscribed. As a result, Bancorp expects to issue 5.0 million shares
of Common Stock in the rights offering and receive gross proceeds of $10.0
million. Over subscription requests were fulfilled on a pro rata basis. The
excess subscription payments received by the subscription agent will be returned
without interest.




95




---



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 and accumulated
and communicated to our management, including our CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Our management has
evaluated, with the participation and under the supervision of our chief
executive officer (“CEO”) and chief financial officer (“CFO”), the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act) as of the end of the period covered by this
report. Based on this evaluation, our CEO and CFO have concluded that, as of
such date, the Company’s disclosure controls and procedures are effective in
ensuring that information relating to the Company, including its consolidated
subsidiaries, required to be disclosed in reports that it files under the
Exchange Act is (1) recorded, processed, summarized and reported within the time
periods specified in the 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




None.




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, 2009. 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, 2009, 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, 2009.




The Company’s independent registered public
accounting firm has audited the Company’s internal control over financial
reporting as of December 31, 2009, as stated in their report appearing below.




96




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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM




To the Board of
Directors and Stockholders ofWest Coast BancorpLake Oswego, Oregon




We have audited the
internal control over financial reporting of West Coast Bancorp and subsidiaries
(the "Company") as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Because management's
assessment and our audit were conducted to meet the reporting requirements of
Section 112 of the Federal Deposit Insurance Corporation Improvement Act
(FDICIA), management's assessment and our audit of the Company's internal
control over financial reporting included controls over the preparation of the
schedules equivalent to the basic financial statements in accordance with the
instructions for the Consolidated Financial Statements for Bank Holding
Companies (Form FR Y-9C). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying management’s report on internal control over
financial reporting 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, 2009, 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, 2009 of the Company and our report dated March 11, 2010,
expressed an unqualified opinion on those financial statements.




/s/ DELOITTE & TOUCHE
LLP






Portland,
OregonMarch 11, 2010




97




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ITEM 9B. OTHER INFORMATION




Bancorp held a Special Meeting of
its Shareholders on January 20, 2010. Below is a brief description of matters
considered and voted on by shareholders and the number of votes cast for,
against or withheld on such matters.




1.
            
            Converting certain
      shares of series A Preferred Stock to Common Stock for purposes of Section
      5635 of the Nasdaq Marketplace Rules.


Votes for
            
            Votes against
            
            Abstentions9,024,067
            
            301,379
            
            111,139


2.
            
            Amendment to the Restated Articles of Incorporation to increase the
      number of authorized shares of Common Stock.


Votes for
            
            Votes against
            
            Abstentions9,062,977
            
            257,615
            
            115,993






98




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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 BancorpAttention: Secretary5335 Meadows Road, Suite 201Lake 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.




99




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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.




100




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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:None.(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.”




101




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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 March 11, 2010.




WEST COAST BANCORP(Registrant)By:
            /s/ Robert D.
      SznewajsRobert D.
      SznewajsPresident 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
March 11, 2010.






Principal Executive
      Officer:/s/ Robert D.
      Sznewajs
            
            President and CEO and DirectorRobert D. SznewajsPrincipal Financial
      Officer:/s/ Anders
      Giltvedt
            
            Executive Vice President and Chief Financial OfficerAnders GiltvedtPrincipal Accounting
      Officer:/s/ Kevin M.
      McClung
            
            Senior Vice President and ControllerKevin M. McClungRemaining Directors:*Lloyd D. Ankeny, Chairman*Michael J. Bragg*Duane C. McDougall*Steven J. Oliva*Steven N. Spence*David J. Truitt*Nancy A. Wilgenbusch, PhD.*By
            /s/ Robert D. SznewajsRobert D. SznewajsAttorney-in-Fact


102




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INDEX TO EXHIBITS




Exhibit No.
            
            Exhibit3.1
            
            Restated Articles of Incorporation (as
      amended through January 20, 2010).3.2
            
            Amended and Restated Bylaws of the
      Company (as amended through February 9, 2010).4.1
            
            Form of Class C Warrant. Incorporated by
      reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated
      October 22, 2009, and filed with the Securities and Exchange Commission on
      October 28, 2009 (the "October 8-K").4.2
            
            Tax Benefit Preservation Plan, dated as
      of October 23, 2009, between West Coast Bancorp and Wells Fargo Bank,
      National Association. Incorporated by reference to Exhibit 4.4 to the
      October 8-K.4.3
            
            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.10.1
            
            Form of Indemnification Agreement for
      all directors and executive officers. Incorporated by reference to Exhibit
      10.1 to the Company's Annual Report on Form 10-K for the year ended
      December 31, 2008 (the "2008 10-K").*10.2
            
            Change in Control Agreement between the
      Company and Robert D. Sznewajs dated January 1, 2004, and amended and
      restated December 30, 2008. Incorporated by reference to Exhibit 10.2 to
      the 2008 10-K.*10.3
            
            Change in Control Agreement between the
      Company and Anders Giltvedt dated January 1, 2004, and amended and
      restated December 30, 2008. Incorporated by reference to Exhibit 10.3 to
      the 2008 10-K.*10.4
            
            Change in Control Agreement between the
      Company and Xandra McKeown dated January 1, 2004, and amended and restated
      December 30, 2008. Incorporated by reference to Exhibit 10.4 to the 2008
      10-K.*10.5
            
            Change in Control Agreement between the
      Company and James D. Bygland dated January 1, 2004 and amended and
      restated December 30, 2008. Incorporated by reference to Exhibit 10.5 to
      the 2008 10-K.*10.6
            
            Change in Control Agreement between the
      Company and Hadley Robbins dated March 5, 2007 and amended and restated
      December 30, 2008. Incorporated by reference to Exhibit 10.6 to the 2008
      10-K.*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.
      Incorporated by reference to Exhibit 10.7 to the 2008 10-K.*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. Incorporated by reference to
      Exhibit 10.8 to the 2008 10-K.*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. Incorporated by
      reference to Exhibit 10.9 to the 2008 10-K.*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. Incorporated by
      reference to Exhibit 10.10 to the 2008
10-K.*


*Indicates a
management contract or compensatory plan, contract or arrangement.




103




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INDEX TO EXHIBITS (continued)




Exhibit No.
            
            Exhibit10.11
            
            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. Incorporated by
      reference to Exhibit 10.11 to the 2008 10-K.*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.*10.13
            
            Directors’ Deferred Compensation Plan.
      Incorporated by reference to Exhibit 10.13 to the 2008 10-K.*10.14
            
            Executives’ Deferred Compensation Plan.
      Incorporated by reference to Exhibit 10.14 to the 2008 10-K.*10.15
            
            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.*10.16
            
            2002 Stock Incentive Plan, as amended.
      Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
      Report on Form 10-Q for the quarter ended June 30, 2009.*10.17
            
            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,
    2008.10.18
            
            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.*10.19
            
            Form of Investment Agreement, dated as
      of October 23, 2009 by and between West Coast Bancorp and the investors
      party thereto. Incorporated by reference to Exhibit 10.1 to the October
      8-K.10.20
            
            Order to Cease and Desist issued by the
      FDIC and Oregon Division of Finance and Corporate Securities to West Coast
      Bank on October 22, 2009. Incorporated by reference to Exhibit 10.2 to the
      October 8-K.10.21
            
            Stipulation and Consent to the Issuance
      of an Order to Cease and Desist among West Coast Bank and the FDIC and
      Oregon Division of Finance and Corporate Securities entered into on
      October 15, 2009. Incorporated by reference to Exhibit 10.3 to the October
      8-K.10.22
            
            Written Agreement, dated as of December
      18, 2009, by and among West Coast Bancorp, the Federal Reserve Bank of San
      Francisco and the Oregon Department of Consumer and Business Services,
      Division of Finance and Corporate Securities. Incorporated by reference to
      Exhibit 10.1 to the Company's Current Report on Form 8-K dated December
      18, 2009 and filed with the Securities and Exchange Commission on December
      21, 2009.10.23
            
            Bulk Purchase and Sale Agreement, dated
      effective as of December 30, 2009, by and between West Coast Bank and
      S-Cap 09-5080, LLC, as amended. Incorporated by reference to Exhibit 10.1
      to the Company's Current Report on Form 8-K dated December 30, 2009 and
      filed with the Securities and Exchange Commission on January 6,
      2010.21
            
            Subsidiaries of the
Company.23
            
            Consent of Deloitte & Touche
      LLP.24
            
            Power of Attorney.31.1
            
            Certification.31.2
            
            Certification.32
            
            Certification
      Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of
      the Sarbanes-Oxley Act of 2002.


*Indicates a
management contract or compensatory plan, contract or arrangement.




104




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