Attached files
| file | filename |
|---|---|
| EX-23.1 - CONSENT OF MOSS ADAMS L.L.P. - PACIFIC CONTINENTAL CORP | consentomossadams.htm |
| EX-31.1 - 302 CERTIFICATION, CEO - PACIFIC CONTINENTAL CORP | certification302ceo.htm |
| EX-31.2 - 302 CERTIFICATION, CFO - PACIFIC CONTINENTAL CORP | certification302cfo.htm |
| EX-32 - SECTION 1350 CERTIFICATION - PACIFIC CONTINENTAL CORP | certificationsection1350.htm |
SECURITIES
& EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-K
[ X
] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2009
COMMISSION
FILE NUMBER 0-30106
PACIFIC
CONTINENTAL CORPORATION
(Exact
name of registrant as specified in its charter)
OREGON 93-1269184
(State of
Incorporation)
(IRS Employer Identification No)
111
West 7th Avenue
Eugene,
Oregon 97401
(Address
of principal executive offices)
(541)
686-8685
(Registrant’s
telephone number)
Securities
registered pursuant to section 12(b) of the Act:
Title of Each
Class Name
of Each Exchange on Which Registered
Common
Stock, No par value per
share Nasdaq
Global Select Market
Securities
registered pursuant to 12(g) of the Act:
None
Indicate
by check mark if 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 report pursuant to
Section 13 or Section 15(d) of the
Act Yes __No X
Check
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 whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
______ No
_____
Check if
there is no disclosure of delinquent filers in response to item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of the 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. ( X )
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated
filer __ Accelerated
filer X Non-accelerated
filer __ Smaller Reporting
Company __
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act. Yes __ No X
The
aggregate market value of the voting stock held by non-affiliates of the
registrant at June 30, 2009 (the last business day of the most recent second
quarter) was $143,056,040 based on the closing price as quoted on the NASDAQ
Global Market on that date.
The
number of shares outstanding of the registrant’s common stock, no par value, as
of March 5, 2010, was 18,393,773.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
incorporates by reference information from the registrant’s definitive proxy
statement for the 2010 annual meeting of shareholders.
PACIFIC
CONTINENTAL CORPORATION
FORM
10-K
ANNUAL
REPORT
TABLE OF
CONTENTS
| PART 1 | Page | |
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PART II
|
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|
PART III
|
(Items
10 through 14 are incorporated by reference from Pacific
Continental Corporation’s definitive proxy statement for the annual
meeting of shareholders scheduled for April 19,
2010)
|
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|
77
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|
PART IV
|
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|
79
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|
80
|
PART
I
Item
1. Business
General
Pacific
Continental Corporation (the “Company” or the “Registrant”) is an Oregon
corporation and registered bank holding company located in Eugene,
Oregon. The Company was organized on June 7, 1999, pursuant to a
holding company reorganization of Pacific Continental Bank, its wholly-owned
subsidiary (“the Bank”).
The
Company’s principal business activities are conducted through the Bank, an
Oregon state-chartered bank with deposits insured by the Federal Deposit
Insurance Corporation (“FDIC”). The Bank has two subsidiaries,
PCB Service Corporation (presently inactive), which formerly held and managed
Bank property, and PCB Loan Services (presently inactive), which formerly
managed certain other real estate owned.
The Bank
operates in three primary markets: Portland, Oregon / Southwest Washington;
Seattle, Washington; and Eugene, Oregon. At December 31, 2009, the
Bank operated fourteen full-service offices in six Oregon and three Washington
cities.
Results
For the
year ended December 31, 2009, the consolidated net loss of the Company was $4.9
million or $0.35 per diluted share. The net loss in 2009 was due to
the elevated $36.0 million provision for loan losses. At December 31,
2009, the consolidated shareholders’ equity of the Company was $165.7 million
with 18.4 million shares outstanding and a book value of $9.01 per
share. Total assets were $1,199.1 million. Loans net of
allowance for loan losses and unearned fees, were $931.0 million at December 31,
2009 and represented 77.6% of total assets. Deposits totaled $827.9
million at year-end 2009 with core deposits representing 93.2% or $772.0 million
of total deposits. Core deposits are defined as all deposits gathered
locally and include local time deposits over $100 thousand. During
the year 2009, the Company successfully raised $55.3 million in new capital
through a private offering and a public offering. On January 7, 2009,
the Company announced completion of a private placement of 750 thousand shares
of common stock at $13.50 per share. The net proceeds from the
offering, after underwriting discounts and transaction costs, were approximately
$9.6 million. Due to this successful capital raise in private equity markets, on
January 14, 2009, the Company announced that it had declined to participate in
the US Treasury Capital Purchase Program despite
receiving preliminary approval from the US Treasury to receive up to
$30 million in new capital through issuance of preferred stock. On
October 20, 2009, the Company announced that it had raised approximately $45.7
million of capital, net of underwriting discounts and transaction costs, through
an underwritten public offering by issuing 5.52 million shares of its common
stock at a price of $8.75 per share. At December 31, 2009, the
Company had a tier 1 leverage capital ratio, tier 1 risk-based capital ratio,
and total risk-based capital ratio, of 13.66%, 14.38%, and 15.63%, respectively,
all of which are significantly above the minimum “well-capitalized” level for
all capital ratios under FDIC guidelines of 5%, 6%, and 10%,
respectively. For more information regarding the Company’s financial
condition and results of operations, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and “Financial Statements and
Supplementary Data” in sections 6 and 7 of this Form 10-K.
THE
BANK
General
The Bank
commenced operations on August 15, 1972. At December 31, 2009, the
Bank operated fourteen banking offices in Oregon and Washington. The
primary business strategy of the Bank is to operate in large commercial markets
and to provide comprehensive banking and related services tailored to
community-based business, not-for-profits, professional service providers and
banking services for business owners and executives. The Bank
emphasizes the diversity of its product lines, high levels of personal service,
and through technology, offers convenient access typically associated with
larger financial institutions, while maintaining local decision-making authority
and market knowledge, typical of a local community bank. More
information on the Bank and its banking services can be found on its
Website. The Bank operates under the banking laws of the State of
Oregon, State of Washington and the rules and regulations of the FDIC and the
Federal Reserve Bank of San Francisco.
-3-
Primary
Market Area
The
Bank’s primary markets consist of metropolitan Portland, which includes
Southwest Washington, and metropolitan Eugene in the State of Oregon and
metropolitan Seattle in the State of Washington. The Bank has five
full-service banking offices in the metropolitan Portland and Southwest
Washington area, seven full-service banking offices in the metropolitan Eugene
area, and two full-service offices in the metropolitan Seattle
area. The Bank has its headquarters and administrative office in
Eugene, Oregon.
Competition
Commercial
banking in the states of Oregon and 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, and other financial
institutions. Banking in Oregon and Washington is dominated by
several large banking institutions, including U.S. Bank, Wells Fargo Bank, Bank
of America, Key Bank and Chase, which together account for a majority of the
total commercial and savings bank deposits in Oregon and
Washington. These competitors have significantly greater financial
resources and offer a much greater number of branch locations. The
Bank has attempted to offset the advantage of the larger competitors by focusing
on certain market segments, providing high levels of customization and personal
service, and tailoring its technology, products, and services to the specific
market segments that the Bank serves.
In
addition to larger institutions, numerous “community” banks and credit unions
have been formed, expanded or moved into the Bank’s three primary areas and have
developed a similar focus to the Bank. These institutions have
further increased competition in all three of the Bank’s primary
markets. This number of similar financial institutions and an
increased focus by larger institutions in the Bank’s primary markets has led to
intensified competition in all aspects of the Bank’s business, particularly in
the area of loan and deposit pricing.
The
adoption of the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) has led to
further intensification of competition in the financial services industry.
The GLB Act has eliminated many of the barriers to affiliation among providers
of various types of financial services and has permitted business combinations
among financial service providers such as banks, insurance companies, securities
or brokerage firms, and other financial service providers. Additionally,
the rapid adoption of financial services through the Internet has reduced or
even eliminated many barriers to entry by financial services providers
physically located outside our market area. For example, remote deposit services
allow depository companies physically located in other geographical markets to
service local businesses with minimal cost of entry. Although the Bank has
been able to compete effectively in the financial services business in its
markets to date, there can be no assurance that it will be able to continue to
do so in the future.
The
financial services industry has experienced widespread consolidation over the
last decade and more recently this consolidation has accelerated due to closures
of banks by the FDIC. The Company anticipates that consolidation among
financial institutions in its market area will continue. In particular,
the current economic conditions suggest a number of bank failures are possible
in the Company’s market areas that will contribute to consolidation in the
industry. The Company seeks acquisition opportunities, including FDIC
assisted transactions, from time to time, in its existing markets and in new
markets of strategic importance. However, other financial institutions
aggressively compete against the Bank in the acquisition market.
Some of these institutions may have greater access to capital markets, larger
cash reserves, and stock for use in acquisitions that is more liquid and more
highly valued by the market.
Services
Provided
The Bank
offers a full array of financial service products to meet the banking needs of
its targeted segments in the market areas served. The Bank regularly
reviews the profitability and desirability of various product offerings,
particularly new product offerings, to assure on-going viability.
Deposit
Services
The Bank
offers a full range of deposit services that are typically available in most
banks and other financial institutions, including checking, savings, money
market accounts, and time deposits. The transaction accounts and time
deposits are tailored to the Bank’s primary markets and market segments at rates
competitive with those offered in the area. Additional deposits are
generated through national networks for institutional deposits All
deposit accounts are insured by the FDIC to the maximum amount permitted by
law.
-4-
The Bank
has invested continuously in image technology since 1994 for the processing of
checks. The Bank was the first financial institution in Lane,
Multnomah, Clackamas, and Washington Counties to offer this
service. Due to this investment in image technology, commencing in
July 2007, the Bank has been able to accelerate its funds availability by
presenting all items for clearing to its correspondent banks via an imaged file.
In addition, the Bank provides on-line cash management, remote deposit capture,
and banking services to businesses and consumers. The Bank also allows 24-hour
customer access to deposit and loan information via telephone and on-line cash
management products.
Lending
Activities
The Bank
emphasizes specific areas of lending within its primary market areas: loans to
community-based businesses, professional service providers, not-for-profit
organizations and banking services for business owners and
executives.
Commercial
loans, secured and unsecured, are made primarily to professionals,
community-based businesses, and not-for-profit organizations. These
loans are available for general operating purposes, acquisition of fixed assets,
purchases of equipment and machinery, financing of inventory and accounts
receivable, and other business purposes. The Bank also originates
Small Business Administration (“SBA”) loans and is a national preferred
lender.
Within
its primary markets, the Bank originates permanent and construction loans
financing commercial facilities and pre-sold, custom, and speculative home
construction. The major thrust of residential construction lending is
smaller in-fill construction projects consisting of single-family
residences. However, due to the rapid deterioration in the national
and regional housing market, the Bank severely restricted lending on speculative
home construction and significantly reduced its exposure to residential
construction lending. In addition, due to the economic recession and
softness in commercial real estate markets, the Bank has taken steps to reduce
its exposure to commercial real estate loans, both for construction of new
facilities and permanent loans for commercial facilities, particularly
investor-owned facilities. The focus of the Bank’s commercial real
estate lending activities is primarily on owner-occupied
facilities. The Bank also finances requests for multi-family
residences.
Inter-agency
guidelines adopted by federal bank regulators mandate that financial
institutions establish real estate lending policies with maximum allowable real
estate loan-to-value limits, subject to an allowable amount of non-conforming
loans as a percentage of capital. The Board of Directors has approved
specific lending policies and procedures for the Bank, and management is
responsible for implementation of the policies. The lending policies
and procedures include guidelines for loan term, loan-to-value ratios that are
within established federal banking guidelines, collateral appraisals, and cash
flow coverage. The loan policies also vest varying levels of loan
authority in management, the Bank’s Loan Committee, and the Board of
Directors. Bank management monitors lending activities through
management meetings, loan committee meetings, monthly reporting, and periodic
review of loans by third-party contractors.
Fixed-rate
and variable rate residential mortgage loans are offered through the Bank’s
mortgage loan department. Most residential mortgage loans originated
are sold in the secondary market along with the mortgage loan servicing
rights.
The Bank
makes secured and unsecured loans to individuals for various purposes including
purchases of automobiles, mobile homes, boats, and other recreational vehicles,
home improvements, education, and personal investment.
Merchant
and Card Services
The Bank
provides merchant card payment services, through an outside processor, for its
client base, including community-based businesses, not-for-profits,
and professional service providers. This includes processing of
credit card transactions and issuance of business credit cards. This
service is an integral part of the Bank’s strategy to focus on marketing to
community-based business, not-for-profits, and professional service
providers. During 2009, the Company processed approximately $190
million in credit card transactions for its merchant
clients. The Bank also offers credit card services to its
business customers and uses an outside vendor for credit card
processing. The Bank does not issue credit cards to
individuals.
-5-
Other
Services
The Bank
provides other traditional commercial and consumer banking services, including
cash management products for businesses, on-line banking, safe deposit services,
debit and ATM cards, ACH transactions, savings bonds, cashier’s checks,
travelers’ checks, notary services and others. The Bank is a member
of numerous ATM networks and utilizes an outside processor for the processing of
these automated transactions.
Subsequent
to the end of the year, the Bank entered into an agreement with Money Pass, an
ATM network provider. This agreement will permit all Bank customers
to use Money Pass ATM’s located throughout the country at no charge to the
customer.
Employees
At
December 31, 2009, the Bank employed 254 full-time equivalent (FTE)
employees with 26 FTE’s in the Seattle market, 53 FTE’s in the Portland market,
82 FTE’s in the Eugene market, and 93 FTE’s in administrative functions located
in Eugene, Oregon. None of these employees are represented by labor
unions, and management believes that the Company’s relationship with employees
is good. The Company emphasizes a positive work environment for its
employees, which is validated by recognition from independent third
parties. During 2009, the Bank was recognized for the eighth
consecutive year by Oregon
Business Magazine as one of Oregon’s Best 100 Companies
for which to work, and was the highest rated financial institution in the
state. In 2004, the Bank was named as the number one small company
(employees under 250) to work for in the State of Oregon by Oregon Business
Magazine. The Bank and its employees have also been recognized
for their involvement in the community. Management continually
strives to retain and attract top talent as well as provide career development
opportunities to enhance skill levels. A number of benefit programs
are available to eligible employees, including group medical plans, paid sick
leave, paid vacation, group life insurance, 401(k) plan, and equity compensation
plans.
Supervision
and Regulation
General
The
following discussion provides an overview of certain elements of the extensive
regulatory framework applicable to the Company and the Bank. This regulatory
framework is primarily designed for the protection of depositors, federal
deposit insurance funds and the banking system as a whole, rather than
specifically for the protection of shareholders. Due to the breadth and growth
of this regulatory framework, our costs of compliance continue to increase in
order to monitor and satisfy these requirements.
To the
extent that this section describes statutory and regulatory provisions, it is
qualified by reference to those provisions. These statutes and regulations, as
well as related policies, are subject to change by Congress, state legislatures
and federal and state regulators. Changes in statutes, regulations or regulatory
policies applicable to us, including the interpretation or implementation
thereof, could have a material effect on our business or operations. Recently,
in light of the recent financial crisis, numerous proposals to modify or expand
banking regulation have surfaced. Based on past history, if any are approved,
they will add to the complexity and cost of our business.
Federal
Bank Holding Company Regulation
General. The
Company is a bank holding company as defined in the Bank Holding Company Act of
1956, as amended (“BHCA”), and is therefore subject to regulation, supervision
and examination by the Federal Reserve. In general, the BHCA limits the business
of bank holding companies to owning or controlling banks and engaging in other
activities closely related to banking. The Company must file reports with and
provide the Federal Reserve such additional information as it may require. Under
the Financial Services Modernization Act of 1999, a bank holding company may
apply to the Federal Reserve to become a financial holding company, and thereby
engage (directly or through a subsidiary) in certain expanded activities deemed
financial in nature, such as securities brokerage and insurance
underwriting.
Holding Company Bank
Ownership. The BHCA requires every bank holding company to
obtain the prior approval of the Federal Reserve before (i) acquiring, directly
or indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares; (ii) acquiring all or substantially all of the assets of another
bank or bank holding company; or (iii) merging or consolidating with another
bank holding company.
-6-
Holding Company Control of
Nonbanks. With some exceptions, the BHCA also prohibits a bank
holding company from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank
or bank holding company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. The principal exceptions to these prohibitions
involve certain non-bank activities that, by statute or by Federal Reserve
regulation or order, have been identified as activities closely related to the
business of banking or of managing or controlling banks.
Transactions with
Affiliates. Subsidiary banks of a bank holding company are
subject to restrictions imposed by the Federal Reserve Act on extensions of
credit to the holding company or its subsidiaries, on investments in their
securities, and on the use of their securities as collateral for loans to any
borrower. These regulations and restrictions may limit the Company’s ability to
obtain funds from the Bank for its cash needs, including funds for payment of
dividends, interest and operational expenses.
Tying
Arrangements. We are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither the Company nor its subsidiaries may condition an extension of credit to
a customer on either (i) a requirement that the customer obtain additional
services provided by us; or (ii) an agreement by the customer to refrain from
obtaining other services from a competitor.
Support of Subsidiary
Banks. Under Federal Reserve policy, the Company is expected
to act as a source of financial and managerial strength to the
Bank. This means that the Company is required to commit, as
necessary, resources to support the Bank. Any capital loans a bank holding
company makes to its subsidiary banks are subordinate to deposits and to certain
other indebtedness of those subsidiary banks.
State Law
Restrictions. As an Oregon corporation, the Company is subject
to certain limitations and restrictions under applicable Oregon corporate law.
For example, state law restrictions and limitations in Oregon include
indemnification of directors, distributions to shareholders, transactions
involving directors, officers or interested shareholders, maintenance of books,
records and minutes, and observance of certain corporate
formalities.
Federal
and State Regulation of Pacific Continental Bank
General. The
Bank is an Oregon commercial bank operating in Oregon and Washington with
deposits insured by the FDIC. As a result, the Bank is subject to
supervision and regulation by the Oregon Department of Consumer and Business
Services and the FDIC. These agencies have the authority to prohibit banks from
engaging in what they believe constitute unsafe or unsound banking practices.
Additionally, the Bank’s branches in Washington are subject to supervision and
regulation by the Washington Department of Financial Institutions and must
comply with applicable Washington laws regarding community reinvestment,
consumer protection, fair lending, and intrastate branching.
Community
Reinvestment. The Community Reinvestment Act of 1977 requires
that, in connection with examinations of financial institutions within their
jurisdiction, the FDIC evaluate the record of the 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. A bank’s community reinvestment record is also considered by
the applicable banking agencies in evaluating mergers, acquisitions and
applications to open a branch or facility.
Insider Credit
Transactions. Banks are also subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to executive
officers, directors, principal shareholders or any related interests of such
persons. Extensions of credit (i) must be made on substantially the same terms,
including interest rates and collateral, and follow credit underwriting
procedures that are at least as stringent as those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to insiders. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties, the imposition of a cease and desist order, and other regulatory
sanctions.
Regulation of
Management. Federal law (i) sets forth circumstances under
which officers or directors of a bank may be removed by the institution's
federal supervisory agency; (ii) places restraints on lending by a bank to its
executive officers, directors, principal shareholders and their related
interests; and (iii) prohibits management personnel of a bank from serving as a
director or in other management positions of another financial institution whose
assets exceed a specified amount or which has an office within a specified
geographic area.
-7-
Safety and Soundness
Standards. Federal law imposes certain non-capital safety and
soundness standards upon banks. These standards cover internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, such other operational and managerial standards as the agency
determines to be appropriate, and standards for asset quality, earnings and
stock valuation. An institution that fails to meet these standards must develop
a plan acceptable to its regulators, specifying the steps that the institution
will take to meet the standards. Failure to submit or implement such a plan may
subject the institution to regulatory sanctions.
Interstate
Banking and Branching
The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate
Act”) relaxed prior interstate branching restrictions under federal law by
permitting nationwide interstate banking and branching under certain
circumstances. Generally, 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. The Interstate Act
requires regulators to consult with community organizations before permitting an
interstate institution to close a branch in a low-income area. Federal banking
agency regulations prohibit banks from using their interstate branches primarily
for deposit production and the federal banking agencies have implemented a
loan-to-deposit ratio screen to ensure compliance with this
prohibition.
Oregon
and Washington have both enacted “opting in” legislation in accordance with the
Interstate Act, allowing banks to engage in interstate merger transactions,
subject to certain “aging” requirements. Oregon restricts an out-of-state bank
from opening de novo branches. However, once an out-of-state bank has acquired a
bank within Oregon, either through merger or acquisition of all or substantially
all of the bank’s assets or through authorized de novo branching, the
out-of-state bank may open additional branches within Oregon. Under Washington
law, an out-of-state bank may, subject to Department of Financial Institutions’
approval, open de novo branches in Washington or acquire an in-state branch so
long as the home state of the out-of-state bank has reciprocal laws with respect
to de novo branching or branch acquisitions.
Dividends
The
principal source of the Company’s cash is from dividends received from the Bank,
which are subject to government regulation and limitations. Regulatory
authorities may prohibit banks and bank holding companies from paying dividends
in a manner that would constitute an unsafe or unsound banking practice or 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 that are greater than retained earnings without approval of the
applicable state regulators. Current guidance from the Federal
Reserve provides, among other things, that dividends per share generally should
not exceed earnings per share, measured over the previous four fiscal
quarters. As a result, since the dividends paid to shareholders over
the last four fiscal quarters have exceeded the Company’s earnings, the Company
does not expect to continue paying dividends at historic levels over the medium
term, and future dividends will depend on sufficient earnings to support them
and approval of appropriate bank regulatory authorities.
Capital
Adequacy
Regulatory Capital
Guidelines. Federal bank regulatory agencies use capital
adequacy guidelines in the examination and regulation of bank holding companies
and banks. The guidelines are “risk-based,” meaning that they are designed to
make capital requirements more sensitive to differences in risk profiles among
banks and bank holding companies.
Tier I and Tier II
Capital. Under the guidelines, an institution’s capital is
divided into two broad categories, Tier I capital and Tier II
capital. Tier I capital generally consists of common stockholders’
equity, surplus and undivided profits. Tier II capital generally
consists of the allowance for loan losses, hybrid capital instruments, and
subordinated debt. The sum of Tier I capital and Tier II capital
represents an institution’s total capital. The guidelines require
that at least 50% of an institution’s total capital consist of Tier I
capital.
Risk-based Capital
Ratios. The adequacy of an institution’s capital is gauged
primarily with reference to the institution’s risk-weighted
assets. The guidelines assign risk weightings to an institution’s
assets in an effort to quantify the relative risk of each asset and to determine
the minimum capital required to support that risk. An institution’s
risk-weighted assets are then compared with its Tier I capital and total capital
to arrive at a Tier I risk-based ratio and a total risk-based
-8-
ratio,
respectively. The guidelines provide that an institution must have a
minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of
8%.
Leverage
Ratio. The guidelines also employ a leverage ratio, which is
Tier I capital as a percentage of average total assets, less
intangibles. 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 minimum leverage ratio is 3%; however, for all but the
most highly rated bank holding companies and for bank holding companies seeking
to expand, regulators expect an additional cushion of at least 1% to
2%.
Prompt Corrective
Action. Under the guidelines, an institution is assigned to
one of five capital categories depending on its total risk-based capital ratio,
Tier I risk-based capital ratio, and leverage ratio, together with certain
subjective factors. The categories range from “well capitalized” to “critically
undercapitalized.” Institutions that are “undercapitalized” or lower
are subject to certain mandatory supervisory corrective actions. During these
challenging economic times, the federal banking regulators have actively
enforced these provisions.
Regulatory
Oversight and Examination
The
Federal Reserve conducts periodic inspections of bank holding companies, which
are performed both onsite and offsite. The supervisory objectives of the
inspection program are to ascertain whether the financial strength of the bank
holding company is being maintained on an ongoing basis and to determine the
effects or consequences of transactions between a holding company or its
non-banking subsidiaries and its subsidiary banks. For holding companies under
$10 billion in assets, the inspection type and frequency varies depending on
asset size, complexity of the organization, and the holding company’s rating at
its last inspection.
Banks are
subject to periodic examinations by their primary regulators. Bank examinations
have evolved from reliance on transaction testing in assessing a bank’s
condition to a risk-focused approach. These examinations are extensive and cover
the entire breadth of operations of the bank. Generally, safety and soundness
examinations occur on an 18-month cycle for banks under $500 million in total
assets that are well capitalized and without regulatory issues, and 12-months
otherwise. Examinations alternate between the federal and state bank regulatory
agency or may occur on a combined schedule. The frequency of consumer compliance
and CRA examinations is linked to the size of the institution and its compliance
and CRA ratings at its most recent examinations. However, the examination
authority of the Federal Reserve and the FDIC allows them to examine supervised
banks as frequently as deemed necessary based on the condition of the bank or as
a result of certain triggering events. Subsequent to December 31,
2009, and based on its annual safety and soundness examination completed by the
FDIC in mid-September, the Bank entered into an informal agreement with the FDIC
and the Oregon Department of Consumer and Business Services, which outlined
specific areas of improvement primarily related to capital levels and levels of
classified assets. In addition, the agreement requires the Company
and the Bank to obtain permission for dividends from the Bank to the Company and
cash dividends to shareholders prior to declaration and payment. At
December 31, 2009, management believes it has achieved all objectives and
improvements requested in the agreement.
Corporate
Governance and Accounting Legislation
Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act of 2002 (the “Act”) addresses, among other
things, corporate governance, auditing and accounting, enhanced and timely
disclosure of corporate information, and penalties for non-compliance.
Generally, the Act (i) requires chief executive officers and chief financial
officers to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission (the “SEC”); (ii) imposes specific and
enhanced corporate disclosure requirements; (iii) accelerates the time frame for
reporting of insider transactions and periodic disclosures by public companies;
(iv) requires companies to adopt and disclose information about corporate
governance practices, including whether or not they have adopted a code of
ethics for senior financial officers and whether the audit committee includes at
least one “audit committee financial expert;” and (v) requires the SEC, based on
certain enumerated factors, to regularly and systematically review corporate
filings.
To deter
wrongdoing, the Act (i) subjects bonuses issued to top executives to
disgorgement if a restatement of a company's financial statements was due to
corporate misconduct; (ii) prohibits an officer or director misleading or
coercing an auditor; (iii) prohibits insider trades during pension fund
“blackout periods”; (iv) imposes new criminal penalties for fraud and other
wrongful acts; and (v) extends the period during which certain securities fraud
lawsuits can be brought against a company or its officers.
As a
publicly reporting company, we are subject to the requirements of the Act and
related rules and regulations issued by the SEC and NASDAQ. After enactment, we
updated our policies and procedures to comply with the Act’s
-9-
requirements
and have found that such compliance, including compliance with Section 404 of
the Act relating to management control over financial reporting, has resulted in
significant additional expense for the Company. We anticipate that we will
continue to incur such additional expense in our ongoing
compliance.
Anti-terrorism
Legislation
USA Patriot Act of
2001. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,
intended to combat terrorism, was renewed with certain amendments in 2006 (the
“Patriot Act”). Certain provisions of the Patriot Act were made
permanent and other sections were made subject to extended “sunset” provisions.
The Patriot Act, in relevant part, (i) prohibits banks from providing
correspondent accounts directly to foreign shell banks; (ii) imposes due
diligence requirements on banks opening or holding accounts for foreign
financial institutions or wealthy foreign individuals; (iii) requires financial
institutions to establish an anti-money-laundering compliance program; and (iv)
eliminates civil liability for persons who file suspicious activity
reports. The Act also includes provisions providing the government
with power to investigate terrorism, including expanded government access to
bank account records. While the Patriot Act has had minimal effect on
our record keeping and reporting expenses, we do not believe that the renewal
and amendment will have a material adverse effect on our business or
operations.
Financial
Services Modernization
Gramm-Leach-Bliley Act of
1999. The Gramm-Leach-Bliley Financial Services Modernization
Act of 1999 brought about significant changes to the laws affecting banks and
bank holding companies. Generally, the Act (i) repeals historical
restrictions on preventing banks from affiliating with securities firms; (ii)
provides a uniform framework for the activities of banks, savings institutions
and their holding companies; (iii) broadens the activities that may be conducted
by national banks and banking subsidiaries of bank holding companies; (iv)
provides an enhanced framework for protecting the privacy of consumer
information and requires notification to consumers of bank privacy policies; and
(v) addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions. Bank
holding companies that qualify and elect to become financial holding companies
can engage in a wider variety of financial activities than permitted under
previous law, particularly with respect to insurance and securities underwriting
activities.
Recent
Legislation
Emergency Economic
Stabilization Act of 2008. In response to the recent financial
crisis, the United States government passed the Emergency Economic Stabilization
Act of 2008 (the “EESA”) on October 3, 2008, which provides the United
States Department of the Treasury (the “Treasury”) with broad authority to
implement certain actions intended to help restore stability and liquidity to
the U.S. financial markets.
Insurance of Deposit
Accounts. The EESA included a
provision for a temporary increase from $100,000 to $250,000 per depositor in
deposit insurance effective October 3, 2008 through December 31, 2013.
After December 31, 2013, deposit accounts are expected to again be insured by
the FDIC, generally up to a maximum of $100,000 per separately insured depositor
and up to a maximum of $250,000 for self-directed retirement
accounts.
Deposit Insurance
Assessments. The FDIC imposes an assessment against
institutions for deposit insurance. This assessment is based on the risk
category of the institution and ranges from 5 to 43 basis points of the
institution’s deposits. In December, 2008, the FDIC adopted a rule that raises
the current deposit insurance assessment rates uniformly for all institutions by
7 basis points (to a range from 12 to 50 basis points) effective for the first
quarter of 2009. In February 2009, the FDIC adopted a final rule
modifying the risk-based assessment system and setting initial base assessment
rates beginning April 1, 2009 at 12 to 45 basis points. The rule also
gives the FDIC the authority to, as necessary, implement emergency special
assessments to maintain the deposit insurance fund. On November 12,
2009, the FDIC approved a final rule requiring all FDIC-insured depository
institutions to prepay estimated quarterly assessments for the fourth quarter
2009 and for all of 2010, 2011, and 2012. The prepayment was
collected on December 30, 2009, along with the institutions’ regular quarterly
deposit insurance assessments for the third quarter 2009. For the
fourth quarter of 2009 and all of 2010, the prepaid assessments will be based on
an institution’s total base assessment rate in effect on September 30,
2009. That rate will be increased by 3 basis points for 2011 and 2012
prepayments. The prepaid assessments will be accounted for as prepaid
expense amortized over the three year period.
-10-
Troubled Asset Relief
Program. Pursuant to the EESA, the Treasury has the ability to purchase
or insure up to $700 billion in troubled assets held by financial
institutions under the Troubled Asset Relief Program (“TARP”). On
October 14, 2008, the Treasury announced it would initially purchase equity
stakes in financial institutions under a Capital Purchase Program (the “CPP”) of
up to $350 billion of the $700 billion authorized under the TARP
legislation. The CPP provides direct equity investment of perpetual preferred
stock by the Treasury in qualified financial institutions, as well as a warrant
to purchase common stock. The program is voluntary and requires an institution
to comply with a number of restrictions and provision, including limits on
executive compensation, stock redemptions, and declaration of
dividends. After receiving preliminary approval from the US Treasury
Department to participate in the CPP, the Company elected not to participate in
light of its capital position and due to its ability to raise capital
successfully in private equity markets.
Temporary Liquidity
Guarantee Program. In October 2008, the FDIC announced
the Temporary Liquidity Guarantee Program, which has two components--the Debt
Guarantee Program and the Transaction Account Guarantee Program. Under the
Transaction Account Guarantee Program any participating depository institution
is able to provide full deposit insurance coverage for non-interest bearing
transaction accounts, regardless of the dollar amount. Under the program,
effective November 14, 2008, insured depository institutions that have not opted
out of the FDIC Temporary Liquidity Guarantee Program will be subject to a 0.10%
surcharge applied to non-interest bearing transaction deposit account balances
in excess of $250,000, which surcharge will be added to the institution’s
existing risk-based deposit insurance assessments. Under the Debt Guarantee
Program, qualifying unsecured senior debt issued by a participating institution
can be guaranteed by the FDIC. The Bank chose to participate in both components
of the FDIC Temporary Liquidity Guaranty Program.
American Recovery and
Reinvestment Act of 2009. On February 17, 2009, the
American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law.
ARRA is intended to help stimulate the economy and is a combination of tax cuts
and spending provisions applicable to a broad range of areas with an estimated
cost of $787 billion. The impact that ARRA may have on the US economy, the
Company and the Bank cannot be predicted with certainty.
Proposed
Legislation
Proposed
legislation that may affect the Company and the Bank is introduced in almost
every legislative session. Certain of such legislation could
dramatically affect the regulation of the banking industry. In light
of the 2008 financial crisis, legislation reshaping the regulatory landscape for
financial institutions has been proposed. A current proposal includes
measures aimed to prevent another financial crisis like the one in 2008 by
forming a federal regulatory body to protect the interests of consumers by
preventing abusive and risky lending practices, increasing supervision and
regulation on financial firms deemed too big to fail, giving shareholders an
advisory vote on executive pay, and regulating complex derivative
instruments. We cannot predict if any such legislation will be
adopted or if it is adopted how it would affect the business of the Bank or the
Company. Past history has demonstrated that new legislation or
changes to existing laws or regulations usually results in a greater compliance
burden and therefore generally increases the cost of doing
business.
Effects
of Government Monetary Policy
Our
earnings and growth are affected not only by general economic conditions, but
also by the fiscal and monetary policies of the federal government, particularly
the Federal Reserve. The Federal Reserve implements national monetary policy for
such purposes as curbing inflation and combating recession, and its open market
operations in U.S. government securities, control of the discount rate
applicable to borrowings from the Federal Reserve, and establishment of reserve
requirements against certain deposits, influence the growth of bank loans,
investments and deposits, and also affect interest rates charged on loans or
paid on deposits. The nature and impact of future changes in monetary policies,
and their impact on us cannot be predicted with certainty.
-11-
Statistical
Information
All
dollar amounts in the following sections are in thousands except where otherwise
indicated.
Selected
Quarterly Information
The
following chart contains data for the last eight quarters ended December 31,
2009. All data, except per share data, is in thousands of dollars.
|
YEAR
|
2009
|
2008
|
||||||||||||||||||||||||||||||
|
QUARTER
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||||||||||||||
|
Interest
income
|
$ | 17,079 | $ | 16,982 | $ | 16,555 | $ | 16,259 | $ | 16,544 | $ | 16,680 | $ | 16,215 | $ | 16,506 | ||||||||||||||||
|
Interest
expense
|
3,295 | 3,265 | 3,168 | 3,108 | 3,350 | 4,377 | 4,057 | 4,890 | ||||||||||||||||||||||||
|
Net
interest income
|
13,784 | 13,717 | 13,387 | 13,151 | 13,194 | 12,203 | 12,158 | 11,616 | ||||||||||||||||||||||||
|
Provision
for loan loss
|
7,000 | 8,300 | 19,200 | 1,500 | 1,050 | 1,050 | 925 | 575 | ||||||||||||||||||||||||
|
Noninterest
income
|
1,079 | 1,109 | 1,196 | 1,021 | 1,042 | 1,047 | 1,163 | 1,017 | ||||||||||||||||||||||||
|
Noninterest
expense
|
7,452 | 7,014 | 8,646 | 8,050 | 7,435 | 7,497 | 7,463 | 7,167 | ||||||||||||||||||||||||
|
Net
income (loss)
|
24 | 279 | (8,129 | ) | 2,947 | 3,833 | 3,020 | 3,007 | 3,079 | |||||||||||||||||||||||
|
PER
COMMON
|
||||||||||||||||||||||||||||||||
|
SHARE
DATA
|
||||||||||||||||||||||||||||||||
|
Net
income (loss) \(basic)
|
$ | - | $ | 0.02 | $ | (0.63 | ) | $ | 0.23 | $ | 0.32 | $ | 0.25 | $ | 0.25 | $ | 0.26 | |||||||||||||||
|
Net
income (loss) (diluted)
|
$ | - | $ | 0.02 | $ | (0.63 | ) | $ | 0.23 | $ | 0.32 | $ | 0.25 | $ | 0.25 | $ | 0.26 | |||||||||||||||
|
Cash
dividends
|
$ | 0.01 | $ | 0.04 | $ | 0.10 | $ | 0.10 | $ | 0.10 | $ | 0.10 | $ | 0.10 | $ | 0.10 | ||||||||||||||||
|
WEIGHTED
AVERAGE
SHARES
OUTSTANDING
|
||||||||||||||||||||||||||||||||
|
Basic
|
16,863 | 12,873 | 12,873 | 12,812 | 12,039 | 11,978 | 11,963 | 11,940 | ||||||||||||||||||||||||
|
Diluted
|
16,904 | 12,909 | 12,873 | 12,857 | 12,095 | 12,034 | 12,030 | 12,006 | ||||||||||||||||||||||||
Investment
Portfolio
The
following chart contains information regarding the Company’s investment
portfolio. All of the Company’s investment securities are accounted
for as available-for-sale and are reported at estimated fair
value. The difference between estimated fair value and amortized
cost, net of deferred taxes, is recorded as a separate component of
shareholders’ equity.
|
INVESTMENT
PORTFOLIO
|
||||||||||||
|
ESTIMATED
FAIR VALUE
|
||||||||||||
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
U.S.
Treasury, U.S. Government agencies and corporations
|
$ | 5,000 | $ | 2,029 | $ | 10,541 | ||||||
|
Obligations
of states and political subdivisions
|
6,709 | 7,485 | 7,514 | |||||||||
|
Other
mortgage-backed securities
|
155,909 | 45,419 | 35,939 | |||||||||
|
Total
|
$ | 167,618 | $ | 54,933 | $ | 53,994 | ||||||
-12-
The
following chart presents the fair value of each investment category by maturity
date and includes a weighted average yield for each
period. Mortgage-backed securities have been classified based on
their December 31, 2009 projected average life.
|
SECURITIES
AVAILABLE-FOR-SALE
|
||||||||||||||||||||||||||||||||
|
After
One
|
After
Five
|
|||||||||||||||||||||||||||||||
|
Year
But
|
Years
But
|
|||||||||||||||||||||||||||||||
|
Within
One Year
|
Within
Five Years
|
Within
Ten Years
|
After
Ten
Years
|
|||||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
US
Treasury, US Government
|
||||||||||||||||||||||||||||||||
|
agencies
and agency
|
|
|||||||||||||||||||||||||||||||
|
mortgage-backed
securities
|
$ | 33,110 | 3.10 | % | $ | 119,762 | 3.72 | % | $ | 6,944 | 5.03 | % | $ | 1,093 | 5.55 | % | ||||||||||||||||
|
Obligations
of states and
|
||||||||||||||||||||||||||||||||
|
political
subdivisions
|
- | - | 2,301 | 3.92 | % | 4,408 | 3.75 | % | - | - | ||||||||||||||||||||||
|
Total
|
$ | 33,110 | 3.10 | % | $ | 122,063 | 3.72 | % | $ | 11,352 | 4.54 | % | $ | 1,093 | 5.55 | % | ||||||||||||||||
Loan
Portfolio
Loans
represent a significant portion of the Company’s total
assets. Average balance and average rates paid by category of loan
for the fourth quarter and full year 2009 is included in the Company’s
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included later in this report. The following table
contains information related to the Company’s loan portfolio for the five-year
periods ended December 31, 2009.
|
LOAN
PORTFOLIO
|
||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Commercial
loans
|
$ | 239,450 | $ | 233,513 | $ | 188,940 | $ | 169,566 | $ | 160,988 | ||||||||||
|
Real
estate loans
|
699,539 | 717,119 | 627,140 | 590,855 | 507,479 | |||||||||||||||
|
Consumer
loans
|
6,763 | 7,455 | 8,226 | 9,168 | 12,463 | |||||||||||||||
| 945,752 | 958,087 | 824,306 | 769,589 | 680,930 | ||||||||||||||||
|
Deferred
loan origination fees, net
|
(1,388 | ) | (1,730 | ) | (1,984 | ) | (2,489 | ) | (2,609 | ) | ||||||||||
| 944,364 | 956,357 | 822,322 | 767,100 | 678,321 | ||||||||||||||||
|
Allowance
for loan losses
|
(13,367 | ) | (10,980 | ) | (8,675 | ) | (8,284 | ) | (7,792 | ) | ||||||||||
| $ | 930,997 | $ | 945,377 | $ | 813,647 | $ | 758,816 | $ | 670,529 | |||||||||||
The
following table presents loan portfolio information by loan category related to
maturity and repricing sensitivity. Variable rate loans are included
in the time frame in which the interest rate on the loan could be first
adjusted. At December 31, 2009, the Bank had approximately $280,000
of variable rate loans at their floors that are included in the analysis
below.
-13-
|
MATURITY
AND REPRICING DATA FOR LOANS
|
||||||||||||||||
|
Commercial
|
Real
Estate
|
Consumer
|
Total
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Three
months or less
|
$ | 64,729 | $ | 220,262 | $ | 4,310 | $ | 289,301 | ||||||||
|
Over
three months through 12 months
|
9,461 | 41,458 | 547 | 51,466 | ||||||||||||
|
Over
1 year through 3 years
|
25,615 | 172,006 | 450 | 198,071 | ||||||||||||
|
Over
3 years through 5 years
|
55,569 | 208,820 | 774 | 265,163 | ||||||||||||
|
Over
5 years through 15 years
|
84,076 | 41,889 | 489 | 126,454 | ||||||||||||
|
Thereafter
|
- | 15,104 | 193 | 15,297 | ||||||||||||
|
Total
loans
|
$ | 239,450 | $ | 699,539 | $ | 6,763 | $ | 945,752 | ||||||||
Loan
Concentrations
At
December 31, 2009, loans to dental professionals totaled $158,433 and
represented 16.8% of outstanding loans. At December 31, 2009,
residential construction loans totaled $41,714 and represented 4.4% of
outstanding loans. In addition, at December 31, 2009, unfunded loan
commitments for residential construction totaled
$9,948. Approximately 75% of the Bank’s loans are secured by real
estate. Management believes the granular nature of the portfolio, from industry
mix, geographic location and loan size, continues to disperse risk concentration
to some degree.
Nonperforming
Assets
The
following table presents nonperforming loans and assets as of the date
shown.
|
NONPERFORMING ASSETS
|
||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Nonaccrual
loans
|
$ | 32,792 | $ | 4,137 | $ | 4,122 | $ | - | $ | 180 | ||||||||||
|
90
or more days past due and still accruing
|
- | - | - | - | - | |||||||||||||||
|
Total
nonperforming loans
|
32,792 | 4,137 | 4,122 | - | 180 | |||||||||||||||
|
Government
guarantees
|
(446 | ) | (239 | ) | (451 | ) | - | (28 | ) | |||||||||||
|
Net
nonperforming loans
|
32,346 | 3,898 | 3,671 | - | 152 | |||||||||||||||
|
Other
Real Estate Owned
|
4,224 | 3,806 | 423 | - | 131 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 36,570 | $ | 7,704 | $ | 4,094 | $ | - | $ | 283 | ||||||||||
|
Nonperforming
assets as a percentage of
|
||||||||||||||||||||
|
of
total assets
|
3.05 | % | 0.71 | % | 0.43 | % | 0.00 | % | 0.04 | % | ||||||||||
If
interest on nonaccrual loans had been accrued, such income would have been
approximately $2,611, $173, and $140, respectively, for years 2009, 2008 and
2007.
Allowance
for Loan Loss
The
following chart presents information about the Company’s allowance for loan
losses. Management and the Board of Directors evaluate the allowance
monthly and consider the amount to be adequate to absorb possible loan
losses.
-14-
|
ALLOWANCE
FOR LOAN LOSS
|
||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Balance
at beginning of year
|
$ | 10,980 | $ | 8,675 | $ | 8,284 | $ | 7,792 | $ | 5,224 | ||||||||||
|
Charges
to the allowance
|
||||||||||||||||||||
|
Real
estate loans
|
(25,449 | ) | (1,235 | ) | - | - | (214 | ) | ||||||||||||
|
Consumer
loans
|
(198 | ) | (118 | ) | (46 | ) | (71 | ) | (106 | ) | ||||||||||
|
Commercial
|
(8,234 | ) | (124 | ) | (350 | ) | (152 | ) | (316 | ) | ||||||||||
|
Total
charges to the allowance
|
(33,881 | ) | (1,477 | ) | (396 | ) | (223 | ) | (636 | ) | ||||||||||
|
Recoveries
against the allowance
|
||||||||||||||||||||
|
Real
estate loans
|
203 | 128 | 15 | 4 | 37 | |||||||||||||||
|
Consumer
loans
|
9 | 23 | 27 | 20 | 56 | |||||||||||||||
|
Commercial
|
56 | 31 | 20 | 91 | 31 | |||||||||||||||
|
Total
recoveries against the allowance
|
268 | 182 | 62 | 115 | 124 | |||||||||||||||
|
Acquisition
|
- | - | - | - | 2,014 | |||||||||||||||
|
Provisions
|
36,000 | 3,600 | 725 | 600 | 1,100 | |||||||||||||||
|
Unfunded
commitments *
|
- | - | - | - | (34 | ) | ||||||||||||||
|
Balance
at end of the year
|
$ | 13,367 | $ | 10,980 | $ | 8,675 | $ | 8,284 | $ | 7,792 | ||||||||||
|
Net
charge offs as a percentage of total
|
||||||||||||||||||||
|
average
loans
|
3.50 | % | 0.15 | % | 0.04 | % | 0.01 | % | 0.10 | % | ||||||||||
* Allowance for unfunded commitments is presented as part of the other liabilities in the balance sheet and has been omitted from this table since implementation of this accounting practice in 2005.
The
following table sets forth the allowance for loan losses allocated by loan type
at December 31, 2009:
|
December
31,
|
|||||||
|
2009
|
%
of Total
|
2008
|
%
of Total
|
||||
|
Real
estate loans
|
$ 8,660
|
64.8%
|
$ 7,586
|
69.1%
|
|||
|
Consumer
loans
|
66
|
0.5%
|
63
|
0.6%
|
|||
|
Commercial
|
2,557
|
19.1%
|
2,253
|
20.5%
|
|||
|
Unallocated
|
2,084
|
15.6%
|
1,078
|
9.8%
|
|||
|
Allowance
for loan losses
|
$ 13,367
|
100.0%
|
$ 10,980
|
100.0%
|
|||
During
2009, the Bank recorded a provision for loan losses of $36,000 compared to
$3,600 for the year 2008. The increase in the loan loss provision was
related to charge offs and deterioration in the overall credit quality of the
loan portfolio, primarily in residential and commercial real estate
loans. At December 31, 2009, the recorded investment in certain loans
totaling $58,861, net of government guarantees, was considered
impaired. Of the total impaired loans at December 31, 2009, $32,346
were on nonaccrual status with a specific reserve of $1,048 provided for in the
ending allowance for loan losses.
While the
Bank saw some positive trends in fourth quarter 2009 with regard to the overall
credit quality of the loan portfolio, management cannot predict the level of the
provision for loan losses, the level of the allowance for loan losses, nor the
level of nonperforming assets in future quarters as a result of uncertain
economic conditions. At December 31, 2009, and as shown above, the
Bank’s unallocated reserves were $2,084 or 15.6% of the total allowance for loan
losses at year end. Management believes that the allowance for loan
losses at December 31, 2009 is adequate and this level of unallocated reserves
was prudent in light of the economic conditions and uncertainty that exists in
the Northwest markets that the Bank serves.
-15-
Deposits
Deposits
represent a significant portion of the Company’s liabilities. Average
balance and average rates paid by category of deposit is included in the
Company’s “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” of this report. The chart below details the
Company’s time deposits at December 31, 2009. The Company does not
have any foreign deposits. Variable rate deposits are listed by first
repricing opportunity.
|
TIME
DEPOSITS
|
||||||||||||
|
Time
Deposits
|
Time
Deposits
|
|||||||||||
|
of
$100,000
Or
More
|
of
less than
$100,000
|
Total
Time
Deposits
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
2010
|
$ | 40,739 | $ | 58,592 | $ | 99,331 | ||||||
|
2011
|
21,950 | 20,872 | 42,822 | |||||||||
|
2012
|
1,949 | 463 | 2,412 | |||||||||
|
2013
|
3,191 | 1,720 | 4,911 | |||||||||
|
2014
|
100 | 283 | 383 | |||||||||
|
Thereafter
|
102 | - | 102 | |||||||||
| $ | 68,031 | $ | 81,930 | $ | 149,961 | |||||||
Borrowings
The
Company uses short-term borrowings to fund fluctuations in deposits and loan
demand. The Company’s subsidiary, Pacific Continental Bank, has
access to both secured and unsecured overnight borrowing lines. The
secured borrowing lines are collateralized by both loans and
securities. At December 31, 2009, the Bank had secured borrowing
lines totaling approximately $360,000 with the Federal Home Loan Bank of Seattle
(“FHLB”). The borrowing line at the FHLB is limited by the lesser of
the value of collateral pledged or amount of FHLB stock held. At
present, the borrowing line is limited by the amount of stock held, which limits
total borrowings at the FHLB to $239,089. The borrowing line with the
Federal Reserve Bank of San Francisco (“FRB”) is limited by the value of
collateral pledged, which at December 31, 2009 was $110,756. At
December 31, 2009, the Bank also had unsecured borrowing lines with various
correspondent banks totaling $75,000. At December 31, 2009, there was
$231,820 available on secured and unsecured borrowing lines with the FHLB, FRB,
and various correspondent banks.
|
SHORT-TERM
BORROWINGS
|
||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Federal
Funds Purchased, FHLB CMA, Federal Reserve,
|
||||||||||||||||
|
&
Short Term Advances
|
||||||||||||||||
|
Average
interest rate
|
||||||||||||||||
|
At
year end
|
0.34 | % | 0.48 | % | 4.39 | % | 5.55 | % | ||||||||
|
For
the year
|
0.49 | % | 2.25 | % | 5.25 | % | 5.31 | % | ||||||||
|
Average
amount outstanding for the year
|
$ | 144,026 | $ | 182,301 | $ | 93,733 | $ | 73,171 | ||||||||
|
Maximum
amount outstanding at any month end
|
$ | 212,001 | $ | 213,225 | $ | 151,360 | $ | 99,410 | ||||||||
|
Amount
outstanding at year end
|
$ | 118,025 | $ | 193,000 | $ | 151,360 | $ | 99,410 | ||||||||
In addition to the short-term borrowings, at December 31, 2009, the Bank had other FHLB borrowings totaling $75,000 with a weighted average interest rate of 3.32% and a remaining average maturity of approximately 2.8 years. More information on long-term borrowings can be found in the Selected Financial Data in Item 5 and in Note 9 in the Consolidated Financial Statements in Item 7 below.
The
Company’s other long-term borrowings consist of $8,248 in junior subordinated
debentures originated on November 28, 2005 and due on January 7,
2036. The interest rate on the debentures is 6.265% until November
2010 after which it is converted to a floating rate of three-month LIBOR plus
135 basis points.
-16-
We
cannot accurately predict the effect of the current economic downturn on our
future results of operations or market price of our stock.
The
national economy, and the financial services sector in particular, are currently
facing challenges of a scope unprecedented in recent history. We
cannot accurately predict the severity or duration of the current economic
downturn, which has adversely impacted the markets we serve. Any
further deterioration in the economies of the nation as a whole or in our
markets would have an adverse effect, which could be material, on our business,
financial condition, results of operations and prospects, and could also cause
the market price of our stock to decline.
The
current economic downturn in the market areas we serve may continue to adversely
impact our earnings and could increase our credit risk associated with our loan
portfolio.
Substantially
all of our loans are to businesses and individuals in western Washington and
Oregon, and a continuing decline in the economies of these market areas could
have a material adverse effect on our business, financial condition, and results
of operations. A series of large Puget Sound-based businesses,
including Microsoft, Starbucks, and Boeing, have implemented substantial
employee layoffs and scaled back plans for future
growth. Additionally, the acquisition of Washington Mutual by
JPMorgan Chase & Co. has resulted in substantial employee layoffs, and has
resulted in a substantial increase in office space availability in downtown
Seattle. Oregon has also seen a similar pattern of large layoffs in
major metropolitan areas, a continued decline in housing prices, and a
significant increase in the state’s unemployment rate. A further
deterioration in economic conditions in the market areas we serve could result
in the following consequences, any of which could have an adverse impact, which
may be material, on our business, financial condition, and results of
operations:
|
·
|
economic
conditions may worsen, increasing the likelihood of credit defaults by
borrowers;
|
|
·
|
loan
collateral values, especially as they relate to commercial and residential
real estate, may decline further, thereby increasing the severity of loss
in the event of loan defaults;
|
|
·
|
demand
for banking products and services may decline, including services for low
cost and non-interest-bearing deposits;
and
|
|
·
|
changes
and volatility in interest rates may negatively impact the yields on
earning assets and the cost of interest-bearing
liabilities.
|
Our
allowance for loan losses may not be adequate to cover actual loan losses, which
could adversely affect our earnings.
We
maintain an allowance for loan losses in an amount that we believe is adequate
to provide for losses inherent in our loan portfolio. While we strive
to carefully manage and monitor credit quality and to identify loans that may be
deteriorating, at any time there are loans included in the portfolio that may
result in losses, but that have not yet been identified as potential problem
loans. Through established credit practices, we attempt to identify
deteriorating loans and adjust the loan loss reserve
accordingly. However, because future events are uncertain, there may
be loans that deteriorate in an accelerated time frame. As a result,
future additions to the allowance at elevated levels may be
necessary. Because the loan portfolio contains a number of commercial
real estate loans with relatively large balances, deterioration in the credit
quality of one or more of these loans may require a significant increase to the
allowance for loan losses. Future additions to the allowance may also
be required based on changes in the financial condition of borrowers, such as
have resulted due to the current, and potentially worsening, economic conditions
or as a result of incorrect assumptions by management in determining the
allowance for loan losses. Additionally, federal banking regulators,
as an integral part of their supervisory function, periodically review our
allowance for loan losses. These regulatory agencies may require us
to recognize further loan loss provisions or charge-offs based upon their
judgments, which may be different from ours. Any increase in the
allowance for loan losses would have an adverse effect, which may be material,
on our financial condition and results of operations.
-17-
Concentration
in real estate loans and the deterioration in the real estate markets we serve
could require material increases in our allowance for loan losses and adversely
affect our financial condition and results of operations.
The
economic downturn is significantly impacting our market area. We have
a high degree of concentration in loans secured by real estate (see Note 3 in
the Notes to Consolidated Financial Statements included in this
report). Further deterioration in the local economies we serve could
have a material adverse effect on our business, financial condition and results
of operations due to a weakening of our borrowers’ ability to repay these loans
and a decline in the value of the collateral securing them. Our
ability to recover on these loans by selling or disposing of the underlying real
estate collateral is adversely impacted by declining real estate values, which
increases the likelihood we will suffer losses on defaulted loans secured by
real estate beyond the amounts provided for in the allowance for loan
losses. This, in turn, could require material increases in our
allowance for loan losses and adversely affect our financial condition and
results of operations, perhaps materially.
Non-performing
assets take significant time to resolve and adversely affect our results of
operations and financial condition.
At
December 31, 2009, our non-performing loans (which include all non-accrual
loans, net of government guarantees) were 3.43% of the loan
portfolio. At December 31, 2009, our non-performing assets (which
include foreclosed real estate) were 3.05% of total assets. These
levels of non-performing loans and assets are at elevated levels compared to
historical norms. Non-performing loans and assets adversely affect
our net income in various ways. Until economic and market conditions
improve, we may expect to continue to incur losses relating to non-performing
assets. We generally do not record interest income on non-performing
loans or other real estate owned, thereby adversely affecting our income, and
increasing our loan administration costs. When we take collateral in
foreclosures and similar proceedings, we are required to mark the related asset
to the then fair market value of the collateral, which may ultimately result in
a loss. An increase in the level of non-performing assets increases
our risk profile and may impact the capital levels our regulators believe are
appropriate in light of the ensuing risk profile. While we reduce
problem assets through loan sales, workouts, and restructurings and otherwise,
decreases in the value of the underlying collateral, or in these borrowers’
performance or financial condition, whether or not due to economic and market
conditions beyond our control, could adversely affect our business, results of
operations and financial condition, perhaps materially. In addition,
the resolution of non-performing assets requires significant commitments of time
from management and our directors, which can be detrimental to the performance
of their other responsibilities. There can be no assurance that we
will not experience future increases in non-performing assets.
Tightening
of credit markets and liquidity risk could adversely affect our business,
financial condition and results of operations.
A
tightening of the credit markets or any inability to obtain adequate funds for
continued loan growth at an acceptable cost could adversely affect our asset
growth and liquidity position and, therefore, our earnings
capability. In addition to core deposit growth, maturity of
investment securities and loan payments, the Company also relies on wholesale
funding sources including unsecured borrowing lines with correspondent banks,
secured borrowing lines with the Federal Home Loan Bank of Seattle and the
Federal Reserve Bank of San Francisco, public time certificates of deposits and
out of area and brokered time certificates of deposit. Our ability to
access these sources could be impaired by deterioration in our financial
condition as well as factors that are not specific to us, such as a disruption
in the financial markets or negative views and expectations for the financial
services industry or serious dislocation in the general credit
markets. In the event such disruption should occur, our ability to
access these sources could be adversely affected, both as to price and
availability, which would limit, or potentially raise the cost of, the funds
available to the Company.
The
FDIC has increased insurance premiums to rebuild and maintain the federal
deposit insurance fund and there may be additional future premium increases and
special assessments.
The FDIC
adopted a final rule revising its risk-based assessment system, effective
April 1, 2009. The changes to the assessment system involve
adjustments to the risk-based calculation of an institution’s unsecured debt,
secured liabilities and brokered deposits. The revisions effectively
result in a range of possible assessments under the risk-based system of 7 to
77.5 basis points. The potential increase in FDIC insurance premiums
will add to our cost of operations and could have a significant impact on the
Company.
The FDIC
also has recently required insured institutions to prepay estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for 2010, 2011 and
2012, and increased the regular assessment rate by three basis points effective
January 1, 2011, as a means of replenishing the deposit insurance
fund. The prepayment totaling $6.2 million
-18-
was
collected from the Bank on December 30, 2009, and was accounted for as a prepaid
expense amortized over the assessment periods.
The FDIC
also recently imposed a special Deposit Insurance assessment of five basis
points on all insured institutions. This emergency assessment was
calculated based on the insured institution’s assets at June 30, 2009, totaled
$510 for the Bank, and was collected on September 30, 2009.
The FDIC
deposit insurance fund may suffer additional losses in the future due to bank
failures. There can be no assurance that there will not be additional
significant deposit insurance premium increases, special assessments or
prepayments in order to restore the insurance fund’s reserve
ratio. Any significant premium increases or special assessments could
have a material adverse effect on our financial condition and results of
operations.
We
do not expect to continue paying dividends on our common stock at historic
levels over the medium term.
Our
ability to pay dividends on our common stock depends on a variety of
factors. On November 18, 2009, we announced a quarterly dividend of
$0.01 per share, payable December 15, 2009, which was a reduction from the prior
quarter’s dividend of $0.04 per share and quarterly dividends of $0.10 per share
declared each prior quarter since the first quarter of 2008. There
can be no assurance that we will be able to continue paying quarterly dividends
commensurate with recent levels, if at all. Current guidance from the
Federal Reserve provides, among other things, that dividends per share generally
should not exceed earnings per share, measured over the previous four fiscal
quarters. As a result, since our dividends over the last four fiscal
quarters have exceeded our earnings, we do not expect to continue paying
dividends at historic levels over the medium term, and future dividends will
depend on sufficient earnings to support them and approval of appropriate bank
regulatory authorities.
We
may be required, in the future, to recognize impairment with respect to
investment securities, including the FHLB stock we hold.
Our
securities portfolio contains whole loan private mortgage-backed securities and
currently includes securities with unrecognized losses. We may
continue to observe volatility in the fair market value of these
securities. We evaluate the securities portfolio for any other than
temporary impairment each reporting period, as required by generally accepted
accounting principles, and as of December 31, 2009, we did not recognize any
securities as other than temporarily impaired. There can be no
assurance, however, that future evaluations of the securities portfolio will not
require us to recognize an impairment charge with respect to these and other
holdings.
In
addition, as a condition to membership in the Federal Home Loan Bank of Seattle
(“FHLB”), we are required to purchase and hold a certain amount of FHLB
stock. Our stock purchase requirement is based, in part, upon the
outstanding principal balance of advances from the FHLB. At December
31, 2009, we had stock in the FHLB of Seattle totaling approximately $10.7
million. The FHLB stock held by us is carried at cost and is subject
to recoverability testing under applicable accounting standards. The
FHLB has discontinued the repurchase of their stock and discontinued the
distribution of dividends. As of December 31, 2009, we did not
recognize an impairment charge related to our FHLB stock
holdings. There can be no assurance, however, that future negative
changes to the financial condition of the FHLB may require us to recognize an
impairment charge with respect to such holdings.
If
the goodwill we have recorded in connection with acquisitions becomes impaired,
it could have an adverse impact on our earnings and capital.
At
December 31, 2009, we had approximately $22.0 million of goodwill on our balance
sheet. In accordance with generally accepted accounting principles,
our goodwill is not amortized but rather evaluated for impairment on an annual
basis or more frequently if events or circumstances indicate that a potential
impairment exists. Such evaluation is based on a variety of factors,
including the quoted price of our common stock, market prices of common stocks
of other banking organizations, common stock trading multiples, discounted cash
flows, and data from comparable acquisitions. There can be no
assurance that future evaluations of goodwill will not result in findings of
impairment and write-downs, which could be material. At December 31,
2009, we did not recognize an impairment charge related to our
goodwill.
-19-
We
may pursue additional capital in the future, which could dilute the holders of
our outstanding common stock and may adversely affect the market price of our
common stock.
On
October 20, 2009, we announced the consummation of a public offering of 5.52
million shares of our common stock at $8.75 per share for gross proceeds of
$48.3 million. Notwithstanding this recent capital raise, from time to
time, particularly in the current uncertain economic environment, we may
consider alternatives for raising capital when opportunities present themselves,
in order to further strengthen our capital and/or better position ourselves to
take advantage of identified or potential opportunities that may arise in the
future. Such alternatives may include issuance and sale of common or
preferred stock, trust preferred securities, or borrowings by the Company, with
proceeds contributed to the Bank. Any such capital raising
alternatives could dilute the holders of our outstanding common stock and may
adversely affect the market price of our common stock.
Our
ability to access markets for funding and acquire and retain customers could be
adversely affected by the deterioration of other financial institutions or if
the financial service industry’s reputation is damaged further.
The
financial services industry continues to be featured in negative headlines about
the global and national credit crisis and the resulting stabilization
legislation enacted by the U.S. federal government. These reports can
be damaging to the industry’s image and potentially erode consumer confidence in
insured financial institutions, such as our banking subsidiary. In
addition, our ability to engage in routine funding and other transactions could
be adversely affected by the actions and financial condition of other financial
institutions. Financial services institutions are interrelated as a
result of trading, clearing, correspondent, counterparty or other
relationships. As a result, defaults by, or even rumors or questions
about, one or more financial services institutions, or the financial services
industry in general, could lead to market-wide liquidity problems, losses of
depositor, creditor and counterparty confidence and could lead to losses or
defaults by us or by other institutions. We could experience material
changes in the level of deposits as a direct or indirect result of other banks’
difficulties or failure, which could affect the amount of capital we
need.
Recent
levels of market volatility were unprecedented and we cannot predict whether
they will return.
From time
to time over the last two of years, the capital and credit markets have
experienced volatility and disruption at unprecedented levels. In
some cases, the markets have produced downward pressure on stock prices and
credit availability for certain issuers without regard to those issuers’
underlying financial strength. If similar levels of market disruption
and volatility return, there can be no assurance that we will not experience an
adverse effect, which may be material, on our ability to access capital and on
our business, financial condition and results of operations.
We
operate in a highly regulated environment and we cannot predict the effect of
recent and pending federal legislation.
As
discussed more fully in the section entitled “Supervision and Regulation”, we
are subject to extensive regulation, supervision and examination by federal and
state banking authorities. In addition, as a publicly traded company,
we are subject to regulation by the Securities and Exchange
Commission. Any change in applicable regulations or federal, state or
local legislation could have a substantial impact on us and our
operations. Additional legislation and regulations that could
significantly affect our powers, authority and operations may be enacted or
adopted in the future, which could have a material adverse effect on our
financial condition and results of operations. In that regard,
proposals for legislation restructuring the regulation of the financial services
industry are currently under consideration. Adoption of such
proposals could, among other things, increase the overall costs of regulatory
compliance. Further, regulators have significant discretion and
authority to prevent or remedy unsafe or unsound practices or violations of laws
or regulations by financial institutions and holding companies in the
performance of their supervisory and enforcement duties. Recently,
these powers have been utilized more frequently due to the serious national,
regional and local economic conditions we are facing. The exercise of
regulatory authority may have a negative impact on our financial condition and
results of operations.
We cannot
accurately predict the actual effects of recent legislation or the proposed
regulatory reform measures and various governmental, regulatory, monetary and
fiscal initiatives which have been and may be enacted on the financial markets,
on the Company and on the Bank. The terms and costs of these activities, or the
failure of these actions to help stabilize the financial markets, asset prices,
market liquidity and a continuation or worsening of current financial market and
economic conditions could materially and adversely affect our business,
financial condition, results of operations, and the trading price of our common
stock.
-20-
Fluctuating
interest rates could adversely affect our profitability.
Our
profitability is dependent to a large extent upon our net interest income, which
is the difference between the interest earned on loans, securities and other
interest-earning assets and interest paid on deposits, borrowings, and other
interest-bearing liabilities. Because of the differences in
maturities and repricing characteristics of our interest-earning assets and
interest-bearing liabilities, changes in interest rates do not produce
equivalent changes in interest income earned on interest-earning assets and
interest paid on interest-bearing liabilities. Accordingly,
fluctuations in interest rates could adversely affect our net interest margin,
and, in turn, our profitability. We manage our interest rate risk
within established guidelines and generally seek an asset and liability
structure that insulates net interest income from large deviations attributable
to changes in market rates. However, our interest rate risk
management practices may not be effective in a highly volatile rate
environment.
We
face strong competition from financial services companies and other companies
that offer banking services.
Our three
major markets are in Oregon and Washington. The banking and financial
services businesses in our market area are highly competitive and increased
competition may adversely impact the level of our loans and
deposits. Ultimately, we may not be able to compete successfully
against current and future competitors. These competitors include
national banks, foreign banks, regional banks and other community
banks. We also face competition from many other types of financial
institutions, including savings and loan associations, finance companies,
brokerage firms, insurance companies, credit unions, mortgage banks and other
financial intermediaries. In particular, our competitors include
major financial companies whose greater resources may afford them a marketplace
advantage by enabling them to maintain numerous locations and mount extensive
promotional and advertising campaigns. Areas of competition include
interest rates for loans and deposits, efforts to obtain loan and deposit
customers and a range in quality of products and services provided, including
new technology driven products and services. If we are unable to
attract and retain banking customers, we may be unable to continue our loan
growth and level of deposits.
Future
acquisitions and expansion activities may disrupt our business and adversely
affect our operating results.
We
regularly evaluate potential acquisitions and expansion
opportunities. To the extent that we grow through acquisitions, we
cannot ensure that we will be able to adequately or profitably manage this
growth. Acquiring other banks, branches or other assets, as well as
other expansion activities, involve various risks including the risks of
incorrectly assessing the credit quality of acquired assets, encountering
greater than expected costs of incorporating acquired banks or branches into our
Company, and being unable to profitably deploy funds acquired in an
acquisition.
Anti-takeover
provisions in our amended and restated articles of incorporation and bylaws and
Oregon law could make a third party acquisition of us difficult.
Our
amended and restated articles of incorporation contain provisions that could
make it more difficult for a third party to acquire us (even if doing so would
be beneficial to our shareholders) and for holders of our common stock to
receive any related takeover premium for their common stock. We are
also subject to certain provisions of Oregon law that could delay, deter or
prevent a change in control of us. These provisions could limit the
price that investors might be willing to pay in the future for shares of our
common stock.
None
ITEM 2 Properties
The
principal properties of the registrant are comprised of the banking facilities
owned by the Bank. The Bank operates fourteen full service
facilities. The Bank owns a total of eight buildings and, with the
exception of two buildings, owns the land on which these buildings are
situated. Significant properties owned by the Bank are as
follows:
|
1)
|
Three-story
building and land with approximately 30,000 square feet located on Olive
Street in Eugene, Oregon.
|
|
2)
|
Building
with approximately 4,000 square feet located on West 11th
Avenue in Eugene, Oregon. The building is on leased
land.
|
|
3)
|
Building
and land with approximately 8,000 square feet located on High Street in
Eugene, Oregon.
|
-21-
|
4)
|
Three-story
building and land with approximately 31,000 square feet located in
Springfield, Oregon. The Bank occupies approximately 5,500
square feet of the first floor and approximately 5,900 square feet on the
second floor and leases out, or is seeking to lease out, the remaining
space.
|
|
5)
|
Building
and land with approximately 3,500 square feet located in Beaverton,
Oregon.
|
|
6)
|
Building
and land with approximately 2,000 square feet located in Junction City,
Oregon.
|
|
7)
|
Building
and land with approximately 5,000 square feet located near the Convention
Center in Portland, Oregon.
|
|
8)
|
Building
with approximately 6,800 square feet located at the Nyberg Shopping Center
in Tualatin, Oregon. The building is on leased
land.
|
The Bank
leases facilities for branch offices in Downtown Seattle, Washington, Downtown
Bellevue, Washington, Downtown Portland, Oregon, and Vancouver,
Washington. In addition, the Bank leases a portion of an adjoining
building to the High Street office for administrative and training
functions. Management considers all owned and leased facilities
adequate for current use.
ITEM
3 Legal
Proceedings
As of the
date of this report, neither the Company nor the Bank or any of its subsidiaries
is party to any material pending legal proceedings, including proceedings of
governmental authorities, other than ordinary routine litigation incidental to
the business of the Bank.
PART II
ITEM 4 Market for Company’s Common Equity, Related
Shareholder Matters and Purchases of Equity
Securities
Issuer
Purchases of Securities
The
Company did not repurchase any shares of its common stock during the fourth
quarter of 2009. During the fourth quarter 2009, the Company
announced it had raised approximately $45,700 of new capital, net of
underwriting discounts and commissions and transaction costs, through an
underwritten public offering by issuing 5,520 shares of its common stock at a
price of $8.75 per share.
Dividends
The
Company pays cash dividends on a quarterly basis, typically in March, June,
September and December of each year. The Board of Directors considers
the dividend amount quarterly and takes a broad perspective in its dividend
deliberations including a review of recent operating performance, capital
levels, and loan concentrations as a percentage of capital, and growth
projections. The Board also considers dividend payout ratios,
dividend yield, and other financial metrics in setting the quarterly
dividend. The Company declared and paid cash dividends of $0.25
per share for the year 2009. That compares to cash dividends of $0.40
per share paid for the year 2008. Regulatory authorities may prohibit the
Company from paying dividends in a manner that would constitute unsafe or
unsound banking practice or would reduce the amount of its capital below that
necessary to meet minimum applicable regulatory capital
requirements. Current guidance from the Federal Reserve provides,
among other things, that dividends per share generally should not exceed
earnings per share, measured over the previous four fiscal
quarters. As a result, since the Company’s dividends to shareholders
over the last four fiscal quarters have exceeded earnings, the Company does not
expect to continue paying dividends at historic levels over the medium term, and
future dividends will depend on sufficient earnings to support them and approval
of appropriate bank regulatory authorities.
-22-
Equity
Compensation Plan Information
|
Year
Ended December 31, 2009
|
|||
|
Number
of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and
Rights (2)
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights (2)
|
Number
of Shares Remaining Available for Future Issuance Under Equity
Compensation Plans (2)
|
|
|
Equity
compensation plans approved by security holders(1)
|
|
|
|
| 919,463 | $14.03 | 576,240 | |
|
|
|||
|
Equity
compensation plans not approved by security holders
|
|
||
| 0 | $0 | 0 | |
|
(1)
|
Under
the Company’s respective equity compensation plans, the Company may grant
incentive stock options and non-qualified stock options, restricted stock,
restricted stock units and stock appreciation rights to its employees and
directors, however only employees may receive incentive stock
options.
|
|
(2)
|
All
amounts have been adjusted to reflect subsequent stock splits and stock
dividends.
|
Market
Information
The
Company’s common stock trades on the NASDAQ Global Select Market under the
symbol PCBK. At March 5, 2010, the Company had 18,393,773 shares of
common stock outstanding held by approximately 2,025 shareholders of
record.
The high,
low and closing sales prices (based on daily closing price) for the last eight
quarters are shown in the table below.
|
YEAR
|
2009
|
2008
|
|||||||
|
QUARTER
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
|
|
Market
value:
|
|||||||||
|
High
|
$12.37
|
$11.78
|
$13.27
|
$14.96
|
$15.00
|
$15.22
|
$14.93
|
$14.44
|
|
|
Low
|
8.54
|
9.46
|
10.79
|
9.99
|
11.58
|
9.26
|
10.99
|
13.75
|
|
|
Close
|
11.44
|
10.53
|
12.13
|
12.92
|
14.97
|
14.64
|
10.99
|
13.90
|
-23-
The
information contained in the following chart entitled “Total Return Performance”
is not considered to be “soliciting material”, or “filed”, or incorporated by
reference in any past or future filing by the Company under the Securities
Exchange Act of 1934 or the Securities Act of 1933 unless and only to the extent
that the Company specifically incorporates it by reference.
STOCK PERFORMANCE GRAPH
The above
graph and following table compares the total cumulative shareholder return on
the Company’s Common Stock, based on reinvestment of all dividends, to the
cumulative total returns of the Russell 2000 Index and SNL Securities $1 Billion
to $5 Billion Bank Asset Size Index. The graph assumes $100 invested
on December 31, 2004, in the Company’s Common Stock and each of the
indices.
|
Period
Ending
|
||||||
|
Index
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
|
Pacific
Continental Corporation
|
100.00
|
102.67
|
127.99
|
92.65
|
114.08
|
89.08
|
|
Russell
2000
|
100.00
|
104.55
|
123.76
|
121.82
|
80.66
|
102.58
|
|
SNL
Bank $1B-$5B
|
100.00
|
98.29
|
113.74
|
82.85
|
68.72
|
49.26
|
-24-
ITEM
5 Selected Financial
Data
Selected
financial data for the past five years is shown in the table below.
($ in
thousands, except for per share data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
For
the year
|
||||||||||||||||||||
|
Net
interest income
|
$ | 54,039 | $ | 49,271 | $ | 43,426 | $ | 40,057 | $ | 30,240 | ||||||||||
|
Provision
for loan losses
|
$ | 36,000 | $ | 3,600 | $ | 725 | $ | 600 | $ | 1,100 | ||||||||||
|
Noninterest
income
|
$ | 4,405 | $ | 4,269 | $ | 3,925 | $ | 4,401 | $ | 4,083 | ||||||||||
|
Noninterest
expense
|
$ | 31,162 | $ | 29,562 | $ | 25,861 | $ | 23,791 | $ | 18,134 | ||||||||||
|
Income
taxes
|
$ | (3,839 | ) | $ | 7,439 | $ | 7,830 | $ | 7,412 | $ | 5,510 | |||||||||
|
Net
income (loss)
|
$ | (4,879 | ) | $ | 12,939 | $ | 12,935 | $ | 12,655 | $ | 9,578 | |||||||||
|
Cash
dividends
|
$ | 3,272 | $ | 4,797 | $ | 4,175 | $ | 3,381 | $ | 2,556 | ||||||||||
|
Per
common share data (1)
|
||||||||||||||||||||
|
Net
income (loss):
|
||||||||||||||||||||
|
Basic
|
$ | (0.35 | ) | $ | 1.08 | $ | 1.09 | $ | 1.09 | $ | 0.98 | |||||||||
|
Diluted
|
$ | (0.35 | ) | $ | 1.08 | $ | 1.08 | $ | 1.08 | $ | 0.95 | |||||||||
|
Cash
dividends
|
$ | 0.25 | $ | 0.40 | $ | 0.35 | $ | 0.29 | $ | 0.25 | ||||||||||
|
Book
value
|
$ | 9.01 | $ | 9.62 | $ | 9.01 | $ | 8.17 | $ | 7.96 | ||||||||||
|
Tangible
book value
|
$ | 7.77 | $ | 7.72 | $ | 7.07 | $ | 6.16 | $ | 5.59 | ||||||||||
|
Market
value, end of year
|
$ | 11.44 | $ | 14.97 | $ | 12.52 | $ | 17.68 | $ | 14.45 | ||||||||||
|
At
year end
|
||||||||||||||||||||
|
Assets
|
$ | 1,199,113 | $ | 1,090,843 | $ | 949,271 | $ | 885,351 | $ | 791,794 | ||||||||||
|
Loans,
less allowance for loan loss (2)
|
$ | 930,997 | $ | 945,787 | $ | 813,647 | $ | 760,957 | $ | 671,171 | ||||||||||
|
Core
deposits (4)
|
$ | 771,986 | $ | 615,832 | $ | 615,892 | $ | 580,210 | $ | 529,794 | ||||||||||
|
Total
deposits
|
$ | 827,918 | $ | 722,437 | $ | 644,424 | $ | 641,272 | $ | 604,271 | ||||||||||
|
Shareholders'
equity
|
$ | 165,662 | $ | 116,165 | $ | 107,509 | $ | 95,735 | $ | 81,412 | ||||||||||
|
Tangible
Equity (3)
|
$ | 142,981 | $ | 93,261 | $ | 84,382 | $ | 72,109 | $ | 57,211 | ||||||||||
|
Average
for the year
|
||||||||||||||||||||
|
Assets
|
$ | 1,129,971 | $ | 1,019,040 | $ | 903,932 | $ | 825,671 | $ | 573,717 | ||||||||||
|
Earning
assets
|
$ | 1,051,315 | $ | 945,856 | $ | 832,451 | $ | 755,680 | $ | 533,930 | ||||||||||
|
Loans,
less allowance for loan losses
|
$ | 943,788 | $ | 882,742 | $ | 785,132 | $ | 712,563 | $ | 501,541 | ||||||||||
|
Core
deposits (4)
|
$ | 703,894 | $ | 613,243 | $ | 590,713 | $ | 533,861 | $ | 425,716 | ||||||||||
|
Total
deposits
|
$ | 782,835 | $ | 699,623 | $ | 654,631 | $ | 605,814 | $ | 461,013 | ||||||||||
|
Interest-paying
liabilities
|
$ | 810,380 | $ | 732,466 | $ | 627,569 | $ | 567,708 | $ | 372,880 | ||||||||||
|
Shareholders'
equity
|
$ | 135,470 | $ | 111,868 | $ | 103,089 | $ | 90,238 | $ | 54,528 | ||||||||||
|
Financial
ratios
|
||||||||||||||||||||
|
Return
on average:
|
||||||||||||||||||||
|
Assets
|
-0.43 | % | 1.27 | % | 1.43 | % | 1.53 | % | 1.67 | % | ||||||||||
|
Equity
|
-3.60 | % | 11.57 | % | 12.55 | % | 14.02 | % | 17.57 | % | ||||||||||
|
Tangible
Equity (3)
|
-4.33 | % | 14.56 | % | 16.23 | % | 19.12 | % | 18.25 | % | ||||||||||
|
Avg
shareholders' equity / avg assets
|
11.99 | % | 10.98 | % | 11.40 | % | 10.93 | % | 9.50 | % | ||||||||||
|
Dividend
payout ratio
|
NM
|
37.07 | % | 32.28 | % | 26.72 | % | 26.69 | % | |||||||||||
|
Risk-based
capital:
|
||||||||||||||||||||
|
Tier
I capital
|
14.38 | % | 10.07 | % | 10.02 | % | 9.97 | % | 9.41 | % | ||||||||||
|
Total
capital
|
15.63 | % | 11.16 | % | 10.98 | % | 11.01 | % | 10.57 | % | ||||||||||
|
(1)
Per common share data is retroactively adjusted to reflect the 10% stock
dividend of 2007.
|
||||||||||||||||||||
|
(2) Outstanding
loans include loans held for sale.
|
||||||||||||||||||||
|
(3)
Tangible equity excludes goodwill and core deposit intangible related to
acquisitions.
|
||||||||||||||||||||
|
(4)
Core deposits include all local time deposits, including local time
deposits over $100.
|
||||||||||||||||||||
-25-
ITEM
6 Management’s Discussion and
Analysis of Financial Condition and Results of Operations
The
following discussion is intended to provide a more comprehensive review of the
Company’s operating results and financial condition than can be obtained from
reading the Consolidated Financial Statements alone. The discussion
should be read in conjunction with the audited financial statements and the
notes included later in this report. All dollar amounts, except per
share data, are expressed in thousands of dollars.
In
addition to historical information, this report may contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include, but are not limited
to, statements about management’s plans, objectives, expectations and intentions
that are not historical facts, and other statements identified by words such as
“expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,”
“seeks,” “estimates” or words of similar meaning. These forward-looking
statements are based on current beliefs and expectations of management and are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company’s control.
In addition, these forward-looking statements are subject to assumptions with
respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations in the
forward-looking statements, including those set forth in this report, or the
documents incorporated by reference:
|
·
|
local
and national economic conditions could be less favorable than expected or
could have a more direct and pronounced effect on us than expected and
adversely affect our ability to continue internal growth at historical
rates and maintain the quality of our earnings
assets;
|
|
·
|
the
local housing / real estate market could continue to
decline;
|
|
·
|
the
risks presented by a continued economic recession, which could adversely
affect credit quality, collateral values, including real estate
collateral, investment values, liquidity and loan originations and loan
portfolio delinquency rates;
|
|
·
|
interest
rate changes could significantly reduce net interest income and negatively
affect funding sources;
|
|
·
|
projected
business increases following any future strategic expansion or opening of
new branches could be lower than
expected;
|
|
·
|
competition
among financial institutions could increase
significantly;
|
|
·
|
the
goodwill we have recorded in connection with acquisitions could become
impaired, which may have an adverse impact on our earnings and
capital;
|
|
·
|
the
reputation of the financial services industry could deteriorate, which
could adversely affect our ability to access markets for funding and to
acquire and retain customers;
|
|
·
|
the
efficiencies we may expect to receive from any investments in personnel,
acquisitions and infrastructure may not be
realized;
|
|
·
|
the
level of non-performing assets and charge-offs or changes in the estimates
of future reserve requirements based upon the periodic review thereof
under relevant regulatory and accounting requirements may
increase;
|
|
·
|
changes
in laws and regulations (including laws and regulations concerning taxes,
banking, securities, executive compensation and insurance) could have a
material adverse effect on our business, financial conditions and results
of operations;
|
|
·
|
acts
of war or terrorism, or natural disasters, such as the effects of pandemic
flu, may adversely impact our
business;
|
|
·
|
the
timely development and acceptance of new banking products and services and
perceived overall value of these products and services by users may
adversely impact our ability to increase market share and control
expenses;
|
|
·
|
changes
in accounting policies and practices, as may be adopted by the regulatory
agencies, as well as the Public Company Accounting Oversight Board, the
Financial Accounting Standards Board and other accounting standard setters
may impact the results of our
operations;
|
|
·
|
the
costs and effects of legal and regulatory developments including the
resolution of legal proceedings or regulatory or other governmental
inquiries and the results of regulatory examinations or reviews may
adversely impact our ability to increase market share and control
expenses; and
|
|
·
|
our
success at managing the risks involved in the foregoing items will have a
significant impact upon our results of operations and future
prospects.
|
Additional
factors that could cause actual results to differ materially from those
expressed in the forward-looking statements are discussed in Risk Factors in
Item 1A. Please take into account that forward-looking statements speak only as
of the date of this report or documents incorporated by reference. The Company
does not undertake any obligation to publicly correct or update any
forward-looking statement if we later become aware that it is not likely to be
achieved.
-26-
HIGHLIGHTS
|
%
Change
|
%
Change
|
|||||||||||||||||||
|
2009
|
2008
|
2009 vs. 2008
|
2007
|
2008 vs. 2007
|
||||||||||||||||
|
Operating
revenue (1)
|
$ | 58,444 | $ | 53,540 | 9 | % | $ | 47,351 | 13 | % | ||||||||||
|
Net
income (loss)
|
$ | (4,879 | ) | $ | 12,939 | -138 | % | $ | 12,935 | 0 | % | |||||||||
|
Earnings
(loss) per share (2)
|
||||||||||||||||||||
|
Basic
|
$ | (0.35 | ) | $ | 1.08 | -132 | % | $ | 1.09 | -1 | % | |||||||||
|
Diluted
|
$ | (0.35 | ) | $ | 1.08 | -132 | % | $ | 1.08 | 0 | % | |||||||||
|
Assets,
period-end
|
$ | 1,199,113 | $ | 1,090,843 | 10 | % | $ | 949,271 | 15 | % | ||||||||||
|
Core
deposits, period-end
|
$ | 771,986 | $ | 615,832 | 25 | % | $ | 615,892 | 0 | % | ||||||||||
|
Deposits,
period-end
|
$ | 827,918 | $ | 722,437 | 15 | % | $ | 644,424 | 12 | % | ||||||||||
|
Return
on assets
|
-0.43 | % | 1.27 | % | 1.43 | % | ||||||||||||||
|
Return
on equity
|
-3.60 | % | 11.57 | % | 12.55 | % | ||||||||||||||
|
Return
on tangible equity (3)
|
-4.33 | % | 14.56 | % | 16.23 | % | ||||||||||||||
|
Net
interest margin
|
5.14 | % | 5.21 | % | 5.22 | % | ||||||||||||||
|
Efficiency
Ratio
|
53.32 | % | 55.21 | % | 54.62 | % | ||||||||||||||
|
(1)
Operating
revenue is defined as net interest income plus noninterest
income.
|
||||||||||||||||||||
|
(2) Per share data for
2007 was retroactively adjusted to reflect the 10% stock dividend paid in
June 2007.
|
||||||||||||||||||||
|
(3) Tangible equity
excludes goodwill and core deposit intangible related to
acquisitions.
|
||||||||||||||||||||
For the
year 2009, the Company recorded a net loss of $4,879, compared to net income of
$12,939 in 2008. The net loss recorded in 2009 and
decline in income from the prior year was primarily due to the $36,000 provision
for loan losses in 2009 as credit losses increased significantly in 2009 over
2008 and the credit quality of the loan portfolio deteriorated due to weak
economic conditions that significantly affected real estate
values. The Company’s core earnings (defined as earnings before
provision for loan losses and taxes) remained strong at $27,282, up 14% over the
prior year. Operating revenue for the year 2009 was up 9% over the
year 2008 and was primarily driven by growth in net interest income, which
accounted for 92% of total operating revenue in 2009. The improvement
in 2009 net interest income was primarily the result of 11% growth in average
earning assets. During 2009, the Company actively managed its
noninterest expense as evidenced by the 53.32% efficiency ratio (noninterest
expense divided by operating revenue) compared to 55.21% for
2008. During the third and fourth quarters of 2009, the Company’s
efficiency ratio was 47.31% and 50.14%, respectively. During
2009, the Company also experienced record growth in outstanding core deposits,
which were up $156,154 or 25% over the prior year end due to expanding existing
deposit relationships and through the development of new deposit
relationships.
Net
income for the year 2008 was $12,939, an increase of $4 over the $12,935
reported for the year 2007. Net income improvement in 2008 over 2007
was modest due to a significant increase in the provision for loan losses, plus
growth in noninterest expenses, which offset increased operating
revenues. Operating revenue for the year 2008 was up 13% over the
year 2007 and was primarily driven by growth in net interest income, which
accounted for 92% of total operating revenue in 2008. The improvement
in 2008 net interest income was the result of 14% growth in average earning
assets combined with a stable net interest margin.
Period-end
assets at December 31, 2009 were $1,199,113, compared to $1,090,843 at December
31, 2008. The increase in period-end assets was primarily
attributable to growth in the Company’s securities portfolio as outstanding
loans at December 31, 2009 were down from the same period last
year. Core deposits, which are defined as demand deposits, interest
checking, money market accounts, and local time deposits (including local time
deposits over $100) were $771,986 and constitute 93% of December 31, 2009
outstanding deposits. Non-interest bearing deposits were $202,088 or
24% of total deposits at year-end December 31, 2009.
-27-
During
2010, the Company believes the following factors could impact reported financial
results:
|
§
|
The
national, regional, and local recession and the effect on loan demand, the
credit quality of existing clients with lending relationships, and vacancy
rates of commercial real estate properties, since a significant portion of
our loan portfolio is secured by real
estate;
|
|
§
|
A
slowing real estate market, and increases in residential home inventories
for sale, and the impact on residential construction lending, delinquency
and default rates of existing residential construction loans in the Bank’s
portfolio, residential mortgage lending, and refinancing activities of
existing homeowners;
|
|
§
|
Changes
and volatility in interest rates negatively impacting yields on earning
assets and the cost of interest-bearing liabilities, thus negatively
affecting the net interest margin and net interest
income;
|
|
§
|
The
ability to grow core deposits during 2010 in a highly competitive
environment where many financial institutions are experiencing liquidity
problems;
|
|
§
|
The
availability of wholesale funding sources due to disruption in the
financial and capital markets;
|
|
§
|
The
ability to manage noninterest expense growth in light of anticipated
increases in regulatory expenses, including FDIC insurance assessments and
expenses related to resolving problem loans;
and
|
|
§
|
The
ability to attract and retain qualified and experienced bankers in all
markets.
|
SUMMARY
OF CRITICAL ACCOUNTING POLICIES
The SEC
defines “critical accounting policies” as those that require the application of
management’s most difficult, subjective, or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in future periods. Significant accounting
policies are described in Note 1 of the Notes to Consolidated Financial
Statements for the year ended December 31, 2009 in Item 7 of this
report. Management believes that the following policies and those
disclosed in the Notes to
Consolidated Financial Statements should be considered critical under the
SEC definition:
Allowance
for Loan Losses and Reserve for Unfunded Commitments
The
allowance for outstanding loans is classified as a contra-asset account
offsetting outstanding loans, and the allowance for unfunded commitments is
classified as an “other” liability on the balance sheet. The
allowance for loan losses is established through a provision for loan losses
charged against earnings. The balances of the allowance for loan
losses for outstanding loans and unfunded commitments are maintained at an
amount management believes will be adequate to absorb known and inherent losses
in the loan portfolio and commitments to loan funds. The appropriate
balance of the allowance for loan losses is determined by applying loss factors
to the credit exposure from outstanding loans and unfunded loan
commitments. Estimated loss factors are based on subjective
measurements including management’s assessment of the internal risk
classifications, changes in the nature of the loan portfolios, industry
concentrations, and the impact of current local, regional, and national economic
factors on the quality of the loan portfolio. Changes in these
estimates and assumptions are reasonably possible and may have a material impact
on the Company’s consolidated financial statements, results of operations, or
liquidity.
Goodwill
and Intangible Assets
At
December 31, 2009, the Company had $22,681 in goodwill and other intangible
assets. In accordance with financial accounting
standards, assets with indefinite lives are no longer amortized, but instead are
periodically tested for impairment. Management performs an impairment
analysis of the intangible assets with indefinite lives at least annually and
has determined that there was no impairment as of December 31, 2009, 2008,
and 2007.
Share-based
Compensation
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued a
revision to the previously issued guidance on accounting for stock options and
other forms of equity-based forms of compensation issued to
employees. This standard became effective in the first quarter of
2006. The Company uses the Black-Scholes option pricing model
-28-
to
measure fair value under this standard which is further discussed in Note 1 of
the Notes to Consolidated Financial Statements in Item 7 below.
The
Company adopted the new accounting standard using the modified prospective
method. Therefore, previously reported financial data was not
restated, and expenses related to equity-based payments granted and vesting
during 2007, 2008, and 2009 were recorded as compensation expense.
Recent Accounting
Pronouncements
Recent
accounting pronouncements are discussed in Note 1 of the Notes to the
Consolidated Financial Statements for the year ended December 31, 2009 in Item 7
of this report. None of these pronouncements are expected to have a
significant effect on the Company’s financial condition or results of
operations.
RESULTS
OF OPERATIONS
Net
Interest Income
The
largest component of the Company’s earnings is net interest
income. Net interest income is the difference between interest income
derived from earning assets, principally loans, and the interest expense
associated with interest-bearing liabilities, principally
deposits. The volume and mix of earning assets and funding sources,
market rates of interest, demand for loans, and the availability of deposits
affect net interest income.
4th
Quarter 2009 Compared to 4th
Quarter 2008
Two
tables follow which analyze the changes in net interest income for the fourth
quarter 2009 and fourth quarter 2008. Table I “Average Balance
Analysis of Net Interest Earnings”, provides information with regard to average
balances of assets and liabilities, as well as associated dollar amounts of
interest income and interest expense, relevant average yields or rates, and net
interest income as a percent of average earning assets. Table II
“Analysis of Changes in Interest Income and Interest Expense”, shows the
increase (decrease) in the dollar amount of interest income and interest expense
and the differences attributable to changes in either volume or
rates.
The
Bank’s net interest margin for the fourth quarter 2009 was 5.02% compared to
5.28% for the fourth quarter 2008. Table I shows that yield on
earning assets for the fourth quarter 2009 of 6.21% was down 42 basis points
from fourth quarter 2008 earning asset yields due to three factors: 1) a decline
in yields on both loans and securities; 2) a change in the mix of earning assets
as average lower yielding securities represented 14% of total average earning
assets in fourth quarter 2009 compared to 6% in fourth quarter 2008; and 3)
interest reversals on loans placed on nonaccrual status during the quarter and
interest lost on loans on nonaccrual status. The Bank was able to
mitigate some of the decline in the yield on loans in 2009 when compared to 2008
through its practice of including floors on most of its variable rate
loans. Loan yields remained relatively stable due to active interest
rate floors on approximately $280,000 of the Bank’s variable rate loan portfolio
at December 31, 2009.
Table I
also shows that the rates paid on interest-bearing core deposits and
interest-bearing wholesale funding did not move down as fast as the decline in
earning asset yields, thus causing the net interest margin to compress by 26
basis points. The cost of interest-bearing core deposits dropped 5
basis points, while the cost of interest-bearing wholesale funding moved down 8
basis points. In total, the total cost of interest-bearing
liabilities decreased 12 basis points in fourth quarter 2009 when compared to
fourth quarter 2008, while earnings asset yields declined by 42 basis points as
noted above.
Table I
also shows the difference between the cost of interest-bearing core deposits and
wholesale funding. Overall, interest-bearing core deposits in fourth
quarter 2009 had a rate of 1.51% or 33 basis points lower than wholesale funding
costs at 1.84%. This spread is similar to the same quarter last year
when the cost of interest-bearing core deposits was 36 basis points below the
cost of interest-bearing wholesale funding. However, in the
historically low interest rate environment, the cost of interest-bearing core
deposits remains well above the cost of short-term wholesale funding as noted by
the 1.51% cost of interest-bearing core deposits in fourth quarter 2009 compared
to 0.56% for federal funds purchased. For as long as the current
interest rate environment persists, and to the extent growth in interest-bearing
core deposits is used to pay down short-term borrowings, there will be an
adverse effect on the Bank’s net interest margin.
Table II
shows the changes in net interest income due to rate and volume for the quarter
ended December 31, 2009. Interest income including loan fees for the
fourth quarter 2009 increased by $535 from the same period last
year. Higher