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Table of Contents

 

 

UNITED STATES

SECURITIES & EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2015.

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                      to                     .

COMMISSION FILE NUMBER: 0-30106

 

 

PACIFIC CONTINENTAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

OREGON   93-1269184

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No)

 

111 West 7th Avenue  
Eugene, Oregon   97401
(Address of principal executive offices)   (Zip Code)

(541) 686-8685

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  x    No  ¨

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

 

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 number of shares of common stock outstanding as of August 1, 2015 was 19,591,703

 

 

 


Table of Contents

PACIFIC CONTINENTAL CORPORATION

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

 

 

PART I   FINANCIAL INFORMATION      3   
ITEM 1   Financial Statements      3   
  Consolidated Balance Sheets      3   
  Consolidated Statements of Income      4   
  Consolidated Statements of Comprehensive Income      5   
  Consolidated Statements of Changes in Shareholders’ Equity      6   
  Consolidated Statements of Cash Flows      7   
  Notes to Consolidated Financial Statements      8   
ITEM 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations      45   
ITEM 3   Quantitative and Qualitative Disclosures about Market Risk      65   
ITEM 4   Controls and Procedures      65   
PART II   OTHER INFORMATION      66   
ITEM 1   Legal Proceedings      66   
ITEM 1A   Risk Factors      66   
ITEM 2   Unregistered Sales of Equity Securities and Use of Proceeds      68   
ITEM 3   Defaults upon Senior Securities      68   
ITEM 4   Mine Safety Disclosures      68   
ITEM 5   Other Information      68   
ITEM 6   Exhibits      69   

 

2


Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1 Financial Statements

Pacific Continental Corporation and Subsidiary

Consolidated Balance Sheets

(In thousands, except share amounts)

(Unaudited)

 

     June 30,
2015
     December 31,
2014
     June 30,
2014
 

ASSETS

        

Cash and due from banks

   $ 29,812       $ 20,929       $ 28,219   

Interest-bearing deposits with banks

     9,790         4,858         15,224   
  

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

     39,602         25,787         43,443   

Securities available-for-sale

     383,618         351,946         344,645   

Loans, less allowance for loan losses and net deferred fees

     1,288,919         1,029,384         1,014,346   

Interest receivable

     5,833         4,773         5,101   

Federal Home Loan Bank stock

     5,468         10,019         10,227   

Property and equipment, net of accumulated depreciation

     17,854         17,820         18,366   

Goodwill and intangible assets

     43,225         23,495         23,555   

Deferred tax asset

     6,036         4,464         7,154   

Taxes receivable

     103         —           —     

Other real estate owned

     12,666         13,374         11,531   

Bank-owned life insurance

     22,571         16,609         16,370   

Other assets

     5,047         6,654         4,025   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,830,942       $ 1,504,325       $ 1,498,763   
  

 

 

    

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Deposits

        

Noninterest-bearing demand

   $ 531,697       $ 407,311       $ 397,942   

Savings and interest-bearing checking

     825,858         646,101         565,265   

Core time deposits

     87,663         57,449         63,335   
  

 

 

    

 

 

    

 

 

 

Total core deposits

     1,445,218         1,110,861         1,026,542   

Other deposits

     68,963         98,232         106,112   
  

 

 

    

 

 

    

 

 

 

Total deposits

     1,514,181         1,209,093         1,132,654   

Repurchase agreements

     368         93         —     

Federal funds and overnight funds purchased

     5,500         —           6,410   

Federal Home Loan Bank borrowings

     84,000         96,000         164,500   

Junior subordinated debentures

     8,248         8,248         8,248   

Accrued interest and other payables

     6,630         6,730         4,814   
  

 

 

    

 

 

    

 

 

 

Total liabilities

     1,618,927         1,320,164         1,316,626   
  

 

 

    

 

 

    

 

 

 

Shareholders’ equity

        

Common stock, shares authorized: 50,000,000; shares issued and outstanding: 19,591,532 at June 30, 2015, 17,717,676 at December 31, 2014, and 17,848,900 at June 30, 2014

     155,325         131,375         132,532   

Retained earnings

     53,150         48,984         45,887   

Accumulated other comprehensive income

     3,540         3,802         3,718   
  

 

 

    

 

 

    

 

 

 
     212,015         184,161         182,137   
  

 

 

    

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 1,830,942       $ 1,504,325       $ 1,498,763   
  

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

3


Table of Contents

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2015     2014     2015     2014  

Interest and dividend income

        

Loans

   $ 16,594      $ 13,514      $ 30,780      $ 26,688   

Taxable securities

     1,736        1,614        3,112        3,146   

Tax-exempt securities

     499        488        1,002        972   

Federal funds sold & interest-bearing deposits with banks

     11        2        16        4   
  

 

 

   

 

 

   

 

 

   

 

 

 
     18,840        15,618        34,910        30,810   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Deposits

     845        821        1,655        1,627   

Federal Home Loan Bank & Federal Reserve borrowings

     239        280        468        560   

Junior subordinated debentures

     56        56        112        112   

Federal funds purchased

     4        4        5        9   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,144        1,161        2,240        2,308   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     17,696        14,457        32,670        28,502   

Provision for loan losses

     550        —          550        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     17,146        14,457        32,120        28,502   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Service charges on deposit accounts

     661        540        1,236        1,058   

Bankcard income

     214        229        411        446   

Bank-owned life insurance income

     170        117        279        234   

Net gain (loss) on sale of investment securities

     139        (100     192        (36

Impairment losses on investment securities (OTTI)

     (13     —          (13     —     

Other noninterest income

     456        370        798        778   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,627        1,156        2,903        2,480   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and employee benefits

     6,992        6,093        13,401        11,912   

Property and equipment

     1,094        924        2,073        1,867   

Data processing

     821        693        1,505        1,362   

Legal and professional services

     491        251        890        739   

Business development

     411        340        765        715   

FDIC insurance assessment

     273        217        486        437   

Other real estate (income) expense

     (60     16        181        239   

Merger related expense

     —          —          1,836        —     

Other noninterest expense

     1,008        735        1,867        1,511   
  

 

 

   

 

 

   

 

 

   

 

 

 
     11,030        9,269        23,004        18,782   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     7,743        6,344        12,019        12,200   

Provision for income taxes

     2,648        2,196        4,122        4,220   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,095      $ 4,148      $ 7,897      $ 7,980   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic

   $ 0.26      $ 0.23      $ 0.42      $ 0.45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.26      $ 0.23      $ 0.41      $ 0.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     19,562,363        17,889,562        18,900,895        17,893,555   

Common stock equivalents attributable to stock-based awards

     226,521        229,850        227,090        236,278   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     19,788,885        18,119,412        19,127,985        18,129,833   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2015     2014     2015     2014  

Net income

   $ 5,095     $ 4,148     $ 7,897      $ 7,980   

Other comprehensive income:

        

Available-for-sale securities:

        

Unrealized (loss) gain arising during the period

     (2,874 )     3,475       (191     6,082   

Reclassification adjustment for (gains) losses realized in net income

     (139 )     100       (192     36   

Reclassification adjustment for impairment losses (OTTI) realized in net income

     13       —          13        —     

Income tax effects

     1,170       (1,394 )     144        (2,385

Derivative agreements—cash flow hedge

        

Unrealized gain (loss) arising during the period

     64       (107 )     (59     (187

Income tax effects

     (25 )     42       23        73   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income, net of tax

     (1,791 )     2,116       (262     3,619   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 3,304     $ 6,264     $ 7,635      $ 11,599   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

     Number
of Shares
    Common
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total  

Balance, December 31, 2013

     17,891,687      $ 133,835      $ 45,250      $ 99      $ 179,184   

Net income

         16,042          16,042   

Other comprehensive income, net of tax

           3,703        3,703   

Stock issuance and related tax benefit

     93,069        203            203   

Stock repurchase

     (267,080     (3,600         (3,600

Share-based compensation expense

       1,454            1,454   

Vested employee RSUs and SARs surrendered to cover tax consequences

       (517         (517

Cash dividends

         (12,308       (12,308
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

     17,717,676      $ 131,375      $ 48,984      $ 3,802      $ 184,161   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

         7,897          7,897   

Other comprehensive income, net of tax

           (262     (262

Stock option exercise

     1,102        13            13   

Stock issuance

     1,872,754        23,578            23,578   

Share-based compensation expense

       956            956   

Vested employee RSUs and SARs surrendered to cover tax consequences

       (597         (597

Cash dividends

         (3,731       (3,731
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

     19,591,532      $ 155,325      $ 53,150      $ 3,540      $ 212,015   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

6


Table of Contents

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

    

Six months ended

June 30,

 
     2015     2014  

Cash flows from operating activities:

    

Net income

   $ 7,897      $ 7,980   

Adjustments to reconcile net income to net cash from operating activities:

    

Depreciation and amortization, net of accretion

     3,678        3,474   

Deferred income taxes

     —          133   

BOLI income

     (279     (234

Share-based compensation

     906        870   

Provision for loan losses

     550        —     

(Gain) loss on sale of investment securities

     (192     36   

Valuation adjustment on foreclosed assets

     52        —     

Gain on sale from foreclosed assets

     (25     (7

Other than temporary impairment on investment securities

     13        —     

Excess tax benefit of stock options exercised

     —          14   

Change in:

    

Interest receivable

     (513     (398

Deferred loan fees

     225        184   

Accrued interest payable and other liabilities

     1,019        (1,406

Income taxes receivable

     553        80   

Other assets

     (661     (656
  

 

 

   

 

 

 

Net cash provided by operating activities

     13,223        10,070   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities and sales of available-for-sale investment securities

     40,935        49,692   

Purchase of available-for-sale investment securities

     (49,579     (43,539

Net loan principal originations

     (57,023     (36,602

Net purchase of property and equipment

     (552     (275

Proceeds on sale of foreclosed assets

     1,645        4,831   

Redemption of Federal Home Loan Bank stock

     5,178        198   

Cash consideration paid, net of cash acquired in merger

     (3,249     —     
  

 

 

   

 

 

 

Net cash used by investing activities

     (62,645     (25,695
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Change in deposits

     77,121        41,674   

Change in repurchase agreements

     275        —     

Change in federal funds purchased and Federal Home Loan Bank short-term borrowings (6,500)

  

    5,760   

Proceeds from stock options exercised

     13        189   

Excess tax benefit from stock options exercised

     —          (14

Redemption of Capital Pacific Bell State Bank Debt

     (3,344     —     

Dividends paid

     (3,731     (7,343

Repurchase of common stock

     —          (1,800

Vested SARs and RSUs surrendered by employee to cover tax consequence

     (597     (506
  

 

 

   

 

 

 

Net cash provided by financing activities

     63,237        37,960   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     13,815        22,335   

Cash and cash equivalents, beginning of period

     25,787        21,108   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 39,602      $ 43,443   
  

 

 

   

 

 

 

Supplemental information:

    

Noncash investing and financing activities:

    

Transfer of loans to foreclosed assets

   $ 964      $ —     

Change in fair value of securities, net of deferred income taxes

   $ (226   $ 3,733   

Change in fair value of cash flow hedge, net of deferred income taxes

   $ (36   $ (114

Acquisitions:

    

Assets acquired

   $ 259,482      $ —     

Liabilities assumed

   $ 235,904      $ —     

Cash paid during the period for:

    

Income taxes

   $ 788      $ 4,195   

Interest

   $ 2,134      $ 2,274   

See accompanying notes.

 

7


Table of Contents

Pacific Continental Corporation and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

A complete set of Notes to Consolidated Financial Statements is a part of the Company’s 2014 Form 10-K filed March 13, 2015. The notes below are included due to material changes in the consolidated financial statements or to provide the reader with additional information not otherwise available. In preparing these consolidated financial statements, the Company has evaluated subsequent events and transactions for potential recognition or disclosure in the consolidated financial statements. All dollar amounts in the following notes are expressed in thousands, except share and per share amounts or where otherwise indicated.

Certain amounts contained in the prior period consolidated financial statements have been reclassified where appropriate to conform to the financial statement presentation used in the current period. These reclassifications had no effect on previously reported net income, earnings per share or retained earnings.

NOTE 1 - BASIS OF PRESENTATION

The accompanying interim consolidated financial statements include the accounts of Pacific Continental Corporation (the “Company”), a bank holding company, and its wholly owned subsidiary, Pacific Continental Bank (the “Bank”), and the Bank’s wholly owned subsidiaries, PCB Services Corporation and PCB Loan Services Corporation (both of which are presently inactive). All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared by the Company without audit and in conformity with generally accepted accounting principles in the United States of America for interim financial information. The consolidated financial statements include all adjustments and normal accruals, which the Company considers necessary for a fair presentation of the results of operations for such interim periods. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, as of the date of the balance sheets and income and expenses for the periods. Actual results could differ from those estimates.

The balance sheet data as of December 31, 2014, was derived from audited consolidated financial statements, but does not include all disclosures contained in the Company’s 2014 Form 10-K. The interim consolidated financial statements should be read in conjunction with the December 31, 2014, consolidated financial statements, including the notes thereto, included in the Company’s 2014 Form 10-K.

 

8


Table of Contents

NOTE 2 – SECURITIES AVAILABLE-FOR-SALE

The amortized cost and estimated fair values of securities available-for-sale at June 30, 2015, were as follows:

 

            Gross      Gross      Estimated  
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  
Unrealized Loss Positions            

Obligations of U.S. government agencies

   $ 10,991       $ —         $ (142    $ 10,849   

Obligations of states and political subdivisions

     25,658         —           (475      25,183   

Private-label mortgage-backed securities

     484         —           (39      445   

Mortgage-backed securities

     37,982         —           (238      37,744   

SBA pools

     10,178         —           (56      10,122   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 85,293       $ —         $ (950    $ 84,343   
  

 

 

    

 

 

    

 

 

    

 

 

 
Unrealized Gain Positions            

Obligations of U.S. government agencies

   $ 44,093       $ 854       $ —         $ 44,947   

Obligations of states and political subdivisions

     59,639         2,565         —           62,204   

Private-label mortgage-backed securities

     2,738         151         —           2,889   

Mortgage-backed securities

     161,415         2,955         —           164,370   

SBA pools

     23,855         112         —           23,967   

Corporate bonds

     898         —           —           898   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 292,638       $ 6,637       $ —         $ 299,275   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 377,931       $ 6,637       $ (950    $ 383,618   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2015, of the 446 investment securities held, there were 82 in unrealized loss positions. Unrealized losses existed on certain securities classified as obligations of U.S. government agencies, obligations of state and political subdivisions, private-label mortgage-backed securities, mortgage-backed securities and SBA pools. The unrealized losses on mortgage-backed securities, securities that are obligations of U.S. government agencies, obligations of state and political subdivisions, and SBA variable rate pools were deemed to be temporary, as these securities retain strong credit ratings, continue to perform adequately, and are backed by various government-sponsored enterprises. These decreases in fair value are associated with the changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and are not due to concerns regarding the underlying credit of the issuers or the underlying collateral. The decline in value of these securities resulted from current economic conditions. Although yields on these securities may be below market rates during the period, no loss of principal is expected.

 

9


Table of Contents

The following table presents a summary of securities in a continuous unrealized loss position at June 30, 2015:

 

     Securities in
Continuous
Unrealized
Loss
Position for
Less Than
12 Months
     Gross
Unrealized Loss
on Securities
in Loss
Position for
Less Than
12 Months
     Securities in
Continuous
Unrealized
Loss
Position for
12 Months
or Longer
     Gross
Unrealized Loss
on Securities
in Loss
Position for
12 Months
or Longer
 

Obligations of U.S. government agencies

   $ 9,367       $ 124       $ 1,482       $ 18   

Obligations of states and political subdivisions

     22,229         350         2,954         125   

Private-label mortgage-backed securities

     —           —           445         39   

Mortgage-backed securities

     32,020         144         5,724         94   

SBA pools

     9,300         55         822         1   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 72,916       $ 673       $ 11,427       $ 277   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the second quarter 2015, management reviewed all private label mortgage-backed securities for the presence of other-than-temporary impairment (“OTTI”) and recorded $13 in OTTI on one security. Management’s OTTI evaluation included the use of independently generated third-party credit surveillance reports that analyze the credit characteristics of the loans underlying each security. These reports include estimates of default rates and severities, life collateral loss rates, and static voluntary prepayment assumptions to generate estimated cash flows at the individual security level. Additionally, management considered factors such as downgraded credit ratings, severity and duration of the impairments, the stability of the issuers, and any discounts paid when the securities were purchased. Management has considered all available information related to the collectability of the impaired investment securities and believes that the estimated credit loss is appropriate.

Following is a tabular roll-forward of the aggregate amount of credit-related OTTI at the beginning and end of the periods presented along with the amounts recognized in earnings during the three and six months ended June 30, 2015, and 2014:

 

     Three months ended      Six months ended  
     June 30,      June 30,  
     2015      2014      2015      2014  

Balance, beginning of period:

   $ 227       $ 227       $ 227       $ 227   

Additions:

           

Initial OTTI credit loss

     13         —           13         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period:

   $ 240       $ 227       $ 240       $ 227   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2015, six of the Company’s private-label mortgage-backed securities with an amortized cost of $1,702 were classified as substandard as their underlying credit was considered impaired. Securities with an amortized cost of $1,879 and $2,050 were classified as substandard at December 31, 2014, and June 30, 2014, respectively.

At June 30, 2015, the projected average life of the securities portfolio was 4.16 years.

 

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The amortized cost and estimated fair values of securities available-for-sale at December 31, 2014, were as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 
Unrealized Loss Positions            

Obligations of U.S. government agencies

   $ 7,573       $ —         $ (72    $ 7,501   

Obligations of states and political subdivisions

     11,755         —           (253      11,502   

Private-label mortgage-backed securities

     847         —           (64      783   

Mortgage-backed securities

     64,644         —           (544      64,100   

SBA pools

     13,059         —           (56      13,003   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 97,878       $ —         $ (989    $ 96,889   
  

 

 

    

 

 

    

 

 

    

 

 

 
Unrealized Gain Positions            

Obligations of U.S. government agencies

   $ 31,068       $ 616       $ —         $ 31,684   

Obligations of states and political subdivisions

     69,172         3,307         —           72,479   

Private-label mortgage-backed securities

     2,924         109         —           3,033   

Mortgage-backed securities

     138,306         2,984         —           141,290   

SBA pools

     6,541         30         —           6,571   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 248,011       $ 7,046       $ —         $ 255,057   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 345,889       $ 7,046       $ (989    $ 351,946   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014, of the 409 investment securities held, there were 71 in unrealized loss positions. The following table presents a summary of securities in a continuous unrealized loss position at December 31, 2014:

 

     Securities in
Continuous
Unrealized
Loss
Position for
Less Than
12 Months
     Gross
Unrealized Loss
on Securities

in Loss
Position for
Less Than

12 Months
     Securities in
Continuous
Unrealized
Loss
Position for
12 Months
or Longer
     Gross
Unrealized Loss
on Securities

in Loss
Position for
12 Months
or  Longer
 

Obligations of U.S. government agencies

   $ 4,564       $ 10       $ 2,936       $ 62   

Obligations of states and political subdivisions

     2,620         39         8,883         214   

Private-label mortgage-backed securities

     303         12         480         52   

Mortgage-backed securities

     40,269         177         23,831         367   

SBA pools

     11,833         49         1,169         7   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 59,589       $ 287       $ 37,299       $ 702   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The amortized cost and estimated fair values of securities available-for-sale at June 30, 2014, were as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair

Value
 
Unrealized Loss Positions            

Obligations of U.S. government agencies

   $ 2,998       $ —         $ (45    $ 2,953   

Obligations of states and political subdivisions

     23,272         —           (586      22,686   

Private-label mortgage-backed securities

     1,246         —           (64      1,182   

Mortgage-backed securities

     43,063         —           (480      42,583   

SBA pools

     5,230         —           (40      5,190   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 75,809       $ —         $ (1,215    $ 74,594   
  

 

 

    

 

 

    

 

 

    

 

 

 
Unrealized Gain Positions            

Obligations of U.S. government agencies

   $ 33,645       $ 565       $ —         $ 34,210   

Obligations of states and political subdivisions

     56,275         2,719         —           58,994   

Private-label mortgage-backed securities

     3,154         107         —           3,261   

Mortgage-backed securities

     166,464         3,672         —           170,136   

SBA pools

     3,422         28         —           3,450   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 262,960       $ 7,091       $ —         $ 270,051   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 338,769       $ 7,091       $ (1,215    $ 344,645   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2014, of the 392 investments held, there were 81 investment securities in unrealized loss positions. The following table presents a summary of securities in a continuous unrealized loss position at June 30, 2014:

 

     Securities in
Continuous
Unrealized
Loss
Position for
Less Than
12 Months
     Gross
Unrealized Loss
on Securities

in Loss
Position for
Less Than

12 Months
     Securities in
Continuous
Unrealized
Loss
Position for
12 Months
or Longer
     Gross
Unrealized Loss
on Securities

in Loss
Position for
12 Months
or  Longer
 

Obligations of U.S. government agencies

   $ —         $ —         $ 2,953       $ 45   

Obligations of states and political subdivisions

     5,515         24         17,171         562   

Private-label mortgage-backed securities

     329         3         854         61   

Mortgage-backed securities

     8,305         27         34,278         453   

SBA pools

     5,189         40         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,338       $ 94       $ 55,256       $ 1,121   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The amortized cost and estimated fair value of securities at June 30, 2015, by maturity, are shown below. Obligations of U.S. government agencies, states and political subdivisions and corporate bonds are shown by contractual maturity. Mortgage-backed securities and SBA variable pools are shown by projected average life.

 

     June 30, 2015  
     Amortized
Cost
     Estimated
Fair

Value
 

Due in one year or less

   $ 11,439       $ 11,554   

Due after one year through 5 years

     224,645         227,738   

Due after 5 years through 10 years

     108,956         111,045   

Due after 10 years

     32,891         33,281   
  

 

 

    

 

 

 
   $ 377,931      $ 383,618   
  

 

 

    

 

 

 

Thirteen securities were sold during the second quarter 2015 for a total book value of $7,574 and a gain of $139. The sold securities included three mortgage-backed securities and ten obligations of states and political subdivisions. During second quarter 2014, the Company sold one private-label mortgage-backed security with a book value of $238 for a loss of $100.

The following table presents investment securities which were pledged to secure public deposits, and repurchase agreements as permitted or required by law:

 

     June 30, 2015      December 31, 2014      June 30, 2014  
     Amortized
Cost
     Estimated
Fair
Value
     Amortized
Cost
     Estimated
Fair
Value
     Amortized
Cost
     Estimated
Fair
Value
 

Pledged to secure public deposits

   $ 30,048       $ 30,777       $ 31,937       $ 32,802       $ 23,123       $ 23,416   

Pledged to secure repurchase agreements

     12,912         13,237         3,976         4,062         2,474         2,548   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 42,960       $ 44,014       $ 35,913       $ 36,864       $ 25,597       $ 25,964   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2015, December 31, 2014 and June 30, 2014, there was an outstanding balance of $368, $93 and $0, respectively for repurchase agreements.

 

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NOTE 3 - LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY INDICATORS

Loans are stated at the amount of unpaid principal net of loan premiums or discounts for purchased loans, net of deferred loan origination fees, discounts associated with retained portions of loans sold, and an allowance for loan losses. Interest on loans is calculated using the simple-interest method on daily balances of the principal amount outstanding. Loan origination fees, net of origination costs and discounts, are amortized over the lives of the loans as adjustments to yield.

Major classifications of period-end loans are as follows:

 

     June 30,     % of Gross     December 31,     % of Gross     June 30,     % of Gross  
     2015     Loans     2014     Loans     2014     Loans  

Real estate loans

            

Multi-family residential

   $ 68,289       5.23   $ 51,586       4.93   $ 50,867        4.93

Residential 1-4 family

     57,112       4.37     47,222       4.51     46,287        4.49

Owner-occupied commercial

     346,065       26.50     259,805       24.84     255,562        24.78

Nonowner-occupied commercial

     275,077       21.06     201,558       19.27     182,141        17.66
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total permanent real estate loans

     746,543       57.16     560,171       53.55     534,857        51.86

Construction loans

            

Multi-family residential

     6,590       0.50     8,472       0.81     19,539        1.89

Residential 1-4 family

     30,145       2.31     28,109       2.69     33,951        3.29

Commercial real estate

     31,659       2.42     18,595       1.78     28,019        2.72

Commercial bare land and acquisition & development

     15,870       1.22     12,159       1.16     11,096        1.08

Residential bare land and acquisition & development

     7,074       0.54     6,632       0.63     6,240        0.61
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction real estate loans

     91,338       6.99     73,967       7.07     98,845        9.59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     837,881       64.15     634,138       60.62     633,702        61.45

Commercial loans

     459,458       35.18     406,568       38.87     392,810        38.10

Consumer loans

     3,783       0.29     3,862       0.37     3,410        0.33

Other loans

     5,025       0.38     1,443       0.14     1,207        0.12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans

     1,306,147       100.00     1,046,011       100.00     1,031,129        100.00

Deferred loan origination fees

     (1,215 )       (990 )       (1,108  
  

 

 

     

 

 

     

 

 

   
     1,304,932         1,045,021         1,030,021     

Allowance for loan losses

     (16,013 )       (15,637 )       (15,675  
  

 

 

     

 

 

     

 

 

   

Total loans, net of allowance for loan losses and net deferred fees

   $ 1,288,919       $ 1,029,384       $ 1,014,346     
  

 

 

     

 

 

     

 

 

   

At June 30, 2015, outstanding loans to dental professionals totaled $321,055 and represented 24.58% of total outstanding loans, compared to dental professional loans of $306,391 or 29.29% of total outstanding loans at December 31, 2014, and $302,822 or 29.37% of total outstanding loans at June 30, 2014. See Note 4 for additional information on the dental loan portfolio. There are no other industry concentrations in excess of 10% of the total loan portfolio. However, as of June 30, 2015, 64.15% of the Company’s loan portfolio was collateralized by real estate and is, therefore, susceptible to changes in real estate market conditions.

 

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Table of Contents

Allowance for Loan Losses

A summary of activity in the allowance for loan losses for the three and six months ended June 30, 2015, and 2014 is as follows:

 

     Three months ended      Six months ended  
     June 30,      June 30,  
     2015      2014      2015      2014  

Balance, beginning of period

   $ 15,724      $ 15,394       $ 15,637       $ 15,917   

Provision charged to income

     550        —           550         —     

Loans charged against allowance

     (454 )      (30      (527      (631

Recoveries credited to allowance

     193        311         353         389   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 16,013      $ 15,675       $ 16,013       $ 15,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

The allowance for loan losses is established as an amount that management considers adequate to absorb possible losses on existing loans within the portfolio. The allowance consists of general, specific, and unallocated components. The general component is based upon all loans collectively evaluated for impairment. The specific component is based upon all loans individually evaluated for impairment. The unallocated component represents credit losses inherent in the loan portfolio that may not have been contemplated in the general risk factors or the specific allowance analysis. Loans are charged against the allowance when management believes the collection of principal or interest is unlikely.

The Company performs regular credit reviews of the loan portfolio to determine the credit quality and adherence to underwriting standards. When loans are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process and on an ongoing basis by management. The Company’s internal risk rating methodology assigns risk ratings ranging from one to ten, where a higher rating represents higher risk. The ten-point risk rating categories are a primary factor in determining an appropriate amount for the allowance for loan losses.

Estimated credit losses reflect consideration of all significant factors that affect the collectability of the loan portfolio. The historical loss rate for each group of loans with similar risk characteristics is determined based on the Company’s own loss experience in that group. Historical loss experience and recent trends in losses provide a reasonable starting point for analysis, however they do not by themselves form a sufficient basis to determine the appropriate level for the allowance for loan losses. Qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical losses are also considered, including but not limited to:

 

    Changes in international, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments,

 

    Changes in the nature and volume of the portfolio and in the terms of loans,

 

    Changes in the experience, ability, and depth of lending management and other relevant staff,

 

    Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans,

 

    Changes in the quality of the institution’s loan review system,

 

    Changes in the value of underlying collateral for collateral-dependent loans,

 

    The existence and effect of any concentrations of credit, and changes in the level of such concentrations,

 

    The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio,

 

    Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses, and

 

    Changes in the current and future US political environment, including debt ceiling negotiations, government shutdown and healthcare reform, that may affect national, regional and local economic conditions, taxation, or disruption of national or global financial markets.

 

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Table of Contents

The adequacy of the allowance for loan losses and the reserve for unfunded commitments is determined using a systematic methodology and is monitored regularly based on management’s evaluation of numerous factors. For each portfolio segment, these factors include:

 

    The quality of the current loan portfolio,

 

    The trend in the migration of the loan portfolio’s risk ratings,

 

    The velocity of migration of losses and potential losses,

 

    Current economic conditions,

 

    Loan concentrations,

 

    Loan growth rates,

 

    Past-due and nonperforming trends,

 

    Evaluation of specific loss estimates for all significant problem loans,

 

    Recovery experience, and

 

    Peer comparison loss rates.

A summary of the activity in the allowance for loan losses by major loan classification follows:

 

     For the three months ended June 30, 2015  
     Commercial
and Other
    Real Estate     Construction      Consumer     Unallocated     Total  

Beginning balance

   $ 5,550      $ 7,537      $ 1,062       $ 52      $ 1,523      $ 15,724   

Charge-offs

     (454     —          —           —          —          (454

Recoveries

     183        3        3         4        —          193   

Provision (reclassification)

     622        124        46         (4     (238     550   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 5,901      $     7,664      $     1,111       $      52      $     1,285      $      16,013   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     For the six months ended June 30, 2015  
     Commercial
and Other
    Real Estate     Construction      Consumer     Unallocated     Total  

Beginning balance

   $ 5,733      $ 7,494      $ 1,077       $ 54      $ 1,279      $ 15,637   

Charge-offs

     (485     (42     —           —          —          (527

Recoveries

     287        48        8         10        —          353   

Provision (reclassification)

     366        164        26         (12     6        550   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $       5,901      $      7,664      $     1,111       $      52      $     1,285      $      16,013   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

At June 30, 2015, the allowance for loan losses on dental loans was $4,080 compared to $4,141 at December 31, 2014 and $4,136 at June 30, 2014. See Note 4 for additional information on the dental loan portfolio.

 

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Table of Contents
     Balances as of June 30, 2015  
     Commercial
and Other
     Real Estate      Construction      Consumer      Unallocated      Total  

Ending allowance: collectively evaluated for impairment

   $ 5,847       $ 7,610       $ 1,002       $ 52       $ 1,285       $ 15,796   

Ending allowance: individually evaluated for impairment

     54         54         109         —           —           217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 5,901       $ 7,664       $ 1,111       $ 52       $ 1,285       $ 16,013   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending loan balance: collectively evaluated for impairment

   $ 462,287       $ 740,753       $ 90,991       $ 3,783       $ —         $ 1,297,814   

Ending loan balance: individually evaluated for impairment

     2,196         5,790         347         —           —           8,333   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 464,483       $ 746,543       $ 91,338       $ 3,783       $ —         $ 1,306,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Balances as of December 31, 2014  
     Commercial
and Other
     Real Estate      Construction      Consumer      Unallocated      Total  

Ending allowance: collectively evaluated for impairment

   $ 5,662       $ 7,438       $ 959       $ 54       $ 1,279       $ 15,392   

Ending allowance: individually evaluated for impairment

     71         56         118         —           —           245   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 5,733       $ 7,494       $ 1,077       $ 54       $ 1,279       $ 15,637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending loan balance: collectively evaluated for impairment

   $ 405,414       $ 555,146       $ 73,610       $ 3,862       $ —         $ 1,038,032   

Ending loan balance: individually evaluated for impairment

     2,597         5,025         357         —           —           7,979   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 408,011       $ 560,171       $ 73,967       $ 3,862       $ —         $ 1,046,011   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Balances as of June 30, 2014  
     Commercial
and Other
     Real Estate      Construction      Consumer      Unallocated      Total  

Ending allowance: collectively evaluated for impairment

   $ 5,580       $ 7,423       $ 1,219       $ 59       $ 1,251       $ 15,532   

Ending allowance: individually evaluated for impairment

     16         6         121         —           —           143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 5,596       $ 7,429       $ 1,340       $ 59       $ 1,251       $ 15,675   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending loan balance: collectively evaluated for impairment

   $ 389,823       $ 528,734       $ 98,480       $ 3,410       $ —         $ 1,020,447   

Ending loan balance: individually evaluated for impairment

     4,194         6,123         365         —           —           10,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 394,017       $ 534,857       $ 98,845       $ 3,410       $ —         $ 1,031,129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Management believes that the allowance for loan losses was adequate as of June 30, 2015. However, future loan losses may exceed the levels provided for in the allowance for loan losses and could possibly result in additional charges to the provision for loan losses.

 

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Table of Contents

Credit Quality Indicators

The Company uses the following loan grades, which are also often used by regulators when assessing the credit quality of a loan portfolio.

Pass – Credit exposure in this category ranges between the highest credit quality to average credit quality. Primary repayment sources generate satisfactory debt service coverage under normal conditions. Cash flow from recurring sources is expected to continue to produce adequate debt service capacity. There are many levels of credit quality contained in the Pass definition, but none of the loans contained in this category rise to the level of Special Mention. This category includes loans with an internal risk rating of 1-6.

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The Bank strictly and carefully employs the FDIC definition in assessing assets that may apply to this category. It is apparent that in many cases asset weaknesses relevant to this definition either (1) better fit a definition of a “well-defined weakness,” or (2) in management’s experience ultimately migrate to worse risk grade categories, such as Substandard and Doubtful. Consequently, management elects to downgrade most potential Special Mention credits to Substandard or Doubtful, and therefore adopts a conservative risk grade process in the use of the Special Mention risk grade. This category includes loans with an internal risk rating of 7.

Substandard – A Substandard asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans in this category are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified Substandard. This category includes loans with an internal risk rating of 8.

Doubtful – An asset classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable. This category includes loans with an internal risk rating of 9.

Management strives to consistently apply these definitions when allocating its loans by loan grade. The loan portfolio is continuously monitored for changes in credit quality and management takes appropriate action to update the loan risk ratings accordingly. Management has not changed the Company’s policy towards its use of credit quality indicators during the periods reported.

 

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The following tables present the Company’s loan portfolio information by loan type and credit grade at June 30, 2015, December 31, 2014, and June 30, 2014:

Credit Quality Indicators

As of June 30, 2015

 

     Loan Grade         
     Pass      Special Mention      Substandard      Doubtful      Totals  

Real estate loans

              

Multi-family residential

   $ 66,793       $ —         $ 1,496       $ —         $ 68,289   

Residential 1-4 family

     49,551         —           7,561         —           57,112   

Owner-occupied commercial

     334,002         —           12,063         —           346,065   

Nonowner-occupied commercial

     270,739         —           4,338         —           275,077   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     721,085         —           25,458         —           746,543   

Construction

              

Multi-family residential

     6,590         —           —           —           6,590   

Residential 1-4 family

     30,073         —           72         —           30,145   

Commercial real estate

     30,512         —           1,147         —           31,659   

Commercial bare land and acquisition & development

     15,586         —           284         —           15,870   

Residential bare land and acquisition & development

     6,592         —           482         —           7,074   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     89,353         —           1,985         —           91,338   

Commercial and other

     450,918         —           13,565         —           464,483   

Consumer

     3,782         —           1         —           3,783   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 1,265,138       $ —         $ 41,009       $ —         $ 1,306,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators

As of December 31, 2014

 

     Loan Grade         
     Pass      Special Mention      Substandard      Doubtful      Totals  

Real estate loans

              

Multi-family residential

   $ 50,074      $ —         $ 1,512      $ —         $ 51,586   

Residential 1-4 family

     39,527        —           7,695        —           47,222   

Owner-occupied commercial

     254,166        —           5,639        —           259,805   

Nonowner-occupied commercial

     197,940        —           3,618        —           201,558   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     541,707        —           18,464        —           560,171   

Construction

              

Multi-family residential

     8,472        —           —           —           8,472   

Residential 1-4 family

     28,109        —           —           —           28,109   

Commercial real estate

     17,645        —           950        —           18,595   

Commercial bare land and acquisition & development

     11,917        —           242        —           12,159   

Residential bare land and acquisition & development

     5,954        —           678        —           6,632   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     72,097        —           1,870        —           73,967   

Commercial and other

     395,918        —           12,093        —           408,011   

Consumer

     3,854        —           8        —           3,862   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 1,013,576      $ —         $ 32,435      $ —         $ 1,046,011   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Credit Quality Indicators

As of June 30, 2014

 

     Loan Grade         
     Pass      Special Mention      Substandard      Doubtful      Totals  

Real estate loans

              

Multi-family residential

   $ 49,341       $ —         $ 1,526       $ —         $ 50,867   

Residential 1-4 family

     38,453         —           7,834         —           46,287   

Owner-occupied commercial

     244,255         4,219         7,088         —           255,562   

Nonowner-occupied commercial

     178,168         —           3,973         —           182,141   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     510,217         4,219         20,421         —           534,857   

Construction

              

Multi-family residential

     19,539         —           —           —           19,539   

Residential 1-4 family

     33,951         —           —           —           33,951   

Commercial real estate

     28,019         —           —           —           28,019   

Commercial bare land and acquisition & development

     10,866         —           230         —           11,096   

Residential bare land and acquisition & development

     5,487         —           753         —           6,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     97,862         —           983         —           98,845   

Commercial and other

     380,601         —           13,416         —           394,017   

Consumer

     3,398         —           12         —           3,410   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 992,078       $ 4,219       $ 34,832       $ —         $ 1,031,129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2015, December 31, 2014, and June 30, 2014, the Company had $1,077, $562 and $417, respectively, in unfunded commitments on its classified loans, which is included in the calculation of our classified asset ratio.

 

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Past Due and Nonaccrual Loans

The Company uses the terms “past due” and “delinquent” interchangeably. Amortizing loans are considered past due or delinquent based upon the number of contractually required payments not made. Delinquency status for all contractually matured loans, commercial and commercial real estate loans with non-monthly amortization, and all other extensions of credit is determined based upon the number of calendar months past due.

The following tables present an aging analysis of past due and nonaccrual loans at June 30, 2015, December 31, 2014, and June 30, 2014:

Age Analysis of Loans Receivable

As of June 30, 2015

 

     30-59 Days
Past Due
Still Accruing
     60-89 Days
Past Due
Still Accruing
     Greater
Than 90 days
Past Due
Still Accruing
     Nonaccrual      Total Past
Due and
Nonaccrual
     Total
Current
     Total Loans
Receivable
 

Real estate loans

                    

Multi-family residential

   $ —         $ —         $ —         $ —         $ —         $ 68,289       $ 68,289   

Residential 1-4 family

     173        —           —           688         861         56,251         57,112   

Owner-occupied commercial

     1,278        338         —           1,117         2,733         343,332         346,065   

Nonowner-occupied commercial

     —           —           —           878         878         274,199         275,077   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,451        338         —           2,683         4,472         742,071         746,543   

Construction

                    

Multi-family residential

     —           —           —           —           —           6,590         6,590   

Residential 1-4 family

     —           —           —           —           —           30,145         30,145   

Commercial real estate

     —           —           —           —           —           31,659         31,659   

Commercial bare land and acquisition & development

     —           —           —           —           —           15,870         15,870   

Residential bare land and acquisition & development

     —           —           —           —           —           7,074         7,074   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —           —           —           —           —           91,338         91,338   

Commercial and other

     686        —           —           955         1,641         462,842         464,483   

Consumer

     6        —           —           —           6         3,777         3,783   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,143      $ 338       $ —         $ 3,638       $ 6,119       $ 1,300,028       $ 1,306,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Age Analysis of Loans Receivable

As of December 31, 2014

 

     30-59 Days
Past Due
Still Accruing
     60-89 Days
Past Due
Still Accruing
     Greater
Than 90 days
Past Due

Still Accruing
     Nonaccrual      Total Past
Due and
Nonaccrual
     Total
Current
     Total Loans
Receivable
 

Real estate loans

                    

Multi-family residential

   $ —           —         $ —         $ —         $ —         $ 51,586       $ 51,586   

Residential 1-4 family

     568        —           —           321         889         46,333         47,222   

Owner-occupied commercial

     —           —           —           599         599         259,206         259,805   

Nonowner-occupied commercial

     605        —           —           906         1,511         200,047         201,558   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,173        —           —           1,826         2,999         557,172         560,171   

Construction

                    

Multi-family residential

     —           —           —           —           —           8,472         8,472   

Residential 1-4 family

     —           —           —           —           —           28,109         28,109   

Commercial real estate

     —           —           —           —           —           18,595         18,595   

Commercial bare land and acquisition & development

     —           —           —           —           —           12,159         12,159   

Residential bare land and acquisition & development

     —           —           —           —           —           6,632         6,632   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —           —           —           —           —           73,967         73,967   

Commercial and other

     327        —           —           869         1,196         406,815         408,011   

Consumer

     4        1         —           —           5         3,857         3,862   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,504      $ 1       $ —         $ 2,695       $ 4,200       $ 1,041,811       $ 1,046,011   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Age Analysis of Loans Receivable

As of June 30, 2014

 

     30-59 Days
Past Due
Still Accruing
     60-89 Days
Past Due
Still Accruing
     Greater
Than 90 days
Past Due
Still Accruing
     Nonaccrual      Total Past
Due and
Nonaccrual
     Total
Current
     Total Loans
Receivable
 

Real estate loans

                    

Multi-family residential

   $ —         $ —         $ —         $ —         $ —         $ 50,867       $ 50,867   

Residential 1-4 family

     —           —           —           473         473         45,814         46,287   

Owner-occupied commercial

     —           —           —           1,703         1,703         253,859         255,562   

Nonowner-occupied commercial

     38         520         —           708         1,266         180,875         182,141   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     38         520         —           2,884         3,442         531,415         534,857   

Construction

                    

Multi-family residential

     —           —           —           —           —           19,539         19,539   

Residential 1-4 family

     —           —           —           —           —           33,951         33,951   

Commercial real estate

     —           —           —           —           —           28,019         28,019   

Commercial bare land and acquisition & development

     —           —           —           —           —           11,096         11,096   

Residential bare land and acquisition & development

     —           —           —           —           —           6,240         6,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —           —           —           —           —           98,845         98,845   

Commercial and other

     —           247         —           2,047         2,294         391,723         394,017   

Consumer

     9         —           —           —           9         3,401         3,410   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47       $ 767       $ —         $ 4,931       $ 5,745       $ 1,025,384       $ 1,031,129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loans

Regular credit reviews of the portfolio are performed to identify loans that are considered potentially impaired. A loan is considered impaired when, based on current information and events, the Company is unlikely to collect all principal and interest due according to the terms of the loan agreement. When the amount of the impairment represents a confirmed loss, it is charged off against the allowance for loan losses. Impaired loans are often reported net of government guarantees to the extent that the guarantees are expected to be collected. Impaired loans generally include all loans classified as nonaccrual and troubled debt restructurings. Impaired loans are included in the specific calculation of allowance for loan losses.

Accrual of interest is discontinued on impaired loans when management believes that, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of principal or interest is doubtful. Accrued but uncollected interest is generally reversed when loans are placed on nonaccrual status. Interest income is subsequently recognized only to the extent cash payments are received satisfying all delinquent principal and interest amounts, and the prospects for future payments in accordance with the loan agreement appear relatively certain. In accordance with GAAP, payments received on nonaccrual loans are applied to the principal balance and no interest income is recognized. Interest income may be recognized on impaired loans that are not on nonaccrual status.

 

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The following tables display an analysis of the Company’s impaired loans at June 30, 2015, December 31, 2014, and June 30, 2014:

Impaired Loan Analysis

As of June 30, 2015

 

     Recorded
Investment
With No Specific
Allowance
Valuation
     Recorded
Investment
With Specific
Allowance
Valuation
     Recorded
Investment
     Unpaid
Principal
Balance
     Average
Recorded
Investment
     Related
Specific
Allowance
Valuation
 

Real estate

                 

Multi-family residential

   $ —         $ —         $ —         $ —         $ —         $ —     

Residential 1-4 family

     878         312        1,190        1,702        1,155        8   

Owner-occupied commercial

     2,144         —           2,144        2,430        1,983        —     

Nonowner-occupied commercial

     2,410         46        2,456        2,552        2,469        46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     5,432         358        5,790        6,684        5,607        54   

Construction

                 

Multi-family residential

     —           —           —           —           —           —     

Residential 1-4 family

     —           —           —           —           28        —     

Commercial real estate

     —           —           —           —           —           —     

Commercial bare land and acquisition & development

     —           —           —           —           —           —     

Residential bare land and acquisition & development

     —           347        347        347        351        109   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —           347        347        347        379        109   

Commercial and other

     1,176         1,020        2,196        2,559        2,456        54   

Consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 6,608       $ 1,725      $ 8,333      $ 9,590      $ 8,442      $ 217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loan Analysis

As of December 31, 2014

 

     Recorded
Investment
With No Specific
Allowance
Valuation
     Recorded
Investment
With Specific
Allowance
Valuation
     Recorded
Investment
     Unpaid
Principal
Balance
     Average
Recorded
Investment
     Related
Specific
Allowance
Valuation
 

Real estate

                 

Multi-family residential

   $ —         $ —         $ —         $ —         $ —         $ —     

Residential 1-4 family

     564        313         877        1,181         1,123        2   

Owner-occupied commercial

     1,645        —           1,645        1,878         2,372        —     

Nonowner-occupied commercial

     2,449        54         2,503        2,523         1,927        54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     4,658        367         5,025        5,582         5,422        56   

Construction

                 

Multi-family residential

     —           —           —           —           —           —     

Residential 1-4 family

     —           —           —           —           —           —     

Commercial real estate

     —           —           —           —           —           —     

Commercial bare land and acquisition & development

     —           —           —           —           —           —     

Residential bare land and acquisition & development

     —           357         357        357         365        118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —           357         357        357         365        118   

Commercial and other

     2,025        572         2,597        2,946         3,924        71   

Consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 6,683      $ 1,296       $ 7,979      $ 8,885       $ 9,711      $ 245   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Impaired Loan Analysis

As of June 30, 2014

 

     Recorded
Investment
With No Specific
Allowance
Valuation
     Recorded
Investment
With Specific
Allowance
Valuation
     Recorded
Investment
     Unpaid
Principal
Balance
     Average
Recorded
Investment
     Related
Specific
Allowance
Valuation
 

Real estate

                 

Multi-family residential

   $ —         $ —         $ —         $ —         $ —         $ —     

Residential 1-4 family

     730         316         1,046         1,373         1,254         4   

Owner-occupied commercial

     2,601         166         2,767         3,001         2,769         2   

Nonowner-occupied commercial

     2,310         —           2,310         2,317         1,078         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     5,641         482         6,123         6,691         5,101         6   

Construction

                 

Multi-family residential

     —           —           —           —           —           —     

Residential 1-4 family

     —           —           —           —           —           —     

Commercial real estate

     —           —           —           —           —           —     

Commercial bare land and acquisition & development

     —           —           —           —           —           —     

Residential bare land and acquisition & development

     —           365         365         365         372         121   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —           365         365         365         372         121   

Commercial and other

     3,672         522         4,194         9,333         4,926         16   

Consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 9,313       $ 1,369       $ 10,682       $ 16,389       $ 10,399       $ 143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The impaired balances reported above are not adjusted for government guarantees of $1,539, $1,123, and $1,151 at June 30, 2015, December 31, 2014, and June 30, 2014, respectively. The recorded investment in impaired loans, net of government guarantees, totaled $6,794, $6,856 and $9,531 at June 30, 2015, December 31, 2014, and June 30, 2014, respectively.

 

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Table of Contents

Troubled Debt Restructurings

In the normal course of business, the Company may modify the terms of certain loans, attempting to protect as much of its investment as possible. Management evaluates the circumstances surrounding each modification to determine whether it is a troubled debt restructuring (“TDR”). TDRs exist when 1) the restructuring constitutes a concession, and 2) the debtor is experiencing financial difficulties.

The following table displays the Company’s TDRs by class at June 30, 2015, December 31, 2014, and June 30, 2014:

 

     June 30, 2015      Troubled Debt Restructurings as of
December 31, 2014
     June 30, 2014  
     Number of
Contracts
     Post-Modification
Outstanding Recorded
Investment
     Number of
Contracts
     Post-Modification
Outstanding Recorded
Investment
     Number of
Contracts
     Post-Modification
Outstanding Recorded
Investment
 

Real estate

                 

Multifamily residential

     —         $ —           —         $ —           —         $ —     

Residential 1-4 family

     6         701         7         768         7         795   

Owner-occupied commercial

     2         1,027         2         1,046         5         1,988   

Non owner-occupied commercial

     7         2,408         7         2,503         3         2,309   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     15         4,136         16         4,317         15         5,092   

Construction

                 

Multifamily residential

     —           —           —           —           —           —     

Residential 1-4 family

     —           —           —           —           —           —     

Commercial real estate

     —           —           —           —           —           —     

Commercial bare land and acquisition & development

     —           —           —           —           —           —     

Residential bare land and acquisition & development

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —           —           —           —           —           —     

Commercial and other

     11         1,941         12         2,259         11         2,553   

Consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     26       $ 6,077         28      $ 6,576         26       $ 7,645   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The recorded investment in TDRs on nonaccrual status totaled $1,730, $1,649, and $2,260 at June 30, 2015, December 31, 2014, and June 30, 2014, respectively. The Company’s policy is that loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain. The Company’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

For the six months ended June 30, 2015, the Company identified no TDRs that were newly considered impaired for which impairment was previously measured under the Company’s general loan loss allowance methodology.

The types of modifications offered can generally be described in the following categories:

Rate Modification - A modification in which the interest rate is modified.

Term Modification - A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest-only Modification - A modification in which the loan is converted to interest-only payments for a period of time.

Combination Modification - Any other type of modification, including the use of multiple types of modifications.

 

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Table of Contents

There were no newly restructured loans identified in the six months ended June 30, 2015. Below is a table of the newly restructured loans identified in the six months ended June 30, 2014.

 

     Troubled Debt Restructurings  
     Identified During the Six Months ended June 30, 2014  
     Rate
Modification
     Term
Modification
     Interest-only
Modification
     Combination
Modification
 

Real estate

           

Multi-family residential

   $ —         $ —         $ —         $ —     

Residential 1-4 family

     —           —           —           —     

Owner-occupied commercial

     —           —           —           —     

Nonowner-occupied commercial

     —           1,601         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     —           1,601         —           —     

Construction

           

Multi-family residential

     —           —           —           —     

Residential 1-4 family

     —           —           —           —     

Commercial real estate

     —           —           —           —     

Commercial bare land and acquisition & development

     —           —           —           —     

Residential bare land and acquisition & development

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —           —           —           —     

Commercial and other

     —           280         574         —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 1,881       $ 574       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Subsequent to a loan being classified as a TDR, a borrower may become unwilling or unable to abide by the terms of the modified agreement. In such cases of default, the Company takes appropriate action to recover principal and interest payments including the use of foreclosure proceedings. There were no TDRs that subsequently defaulted within the first twelve months of restructure during the periods ended June 30, 2015 and 2014.

At June 30, 2015, December 31, 2014, and June 30, 2014, the Company had no commitments to lend additional funds on loans restructured as TDRs.

NOTE 4 – DENTAL LOAN PORTFOLIO

Dental lending is not operated as a business segment, and dental loans are made in the normal course of commercial lending activities throughout the Company. However, to assist in understanding the concentrations and risks associated with the Company’s loan portfolio, the following Note has been included to provide additional information relating to the Company’s dental loan portfolio. At June 30, 2015, December 31, 2014, and June 30, 2014, loans to dental professionals totaled $321,055, $306,391, and $302,822, respectively, and represented 24.58%, 29.29% and 29.37% in principal amount of total outstanding loans, respectively. As of June 30, 2015, December 31, 2014, and June 30, 2014, the dental loans were supported by government guarantees totaling $11,442, $12,700 and $13,967, respectively. These guarantees represented 3.56%, 4.15% and 4.61% in principal amount of the outstanding dental loan balances as of such respective dates. The Company defines a “dental loan” as a loan to dental professionals for the purpose of practice expansion, acquisition or other purpose supported by the cash flows of a dental practice.

 

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Table of Contents

Loan Classification

Major classifications of dental loans at June 30, 2015, December 31, 2014, and June 30, 2014, were as follows:

 

     June 30,
2015
     December 31,
2014
     June 30,
2014
 

Real estate secured loans:

        

Owner-occupied commercial

   $ 59,819      $ 60,092       $ 61,452   

Other dental real estate loans

     2,596        2,785         2,663   
  

 

 

    

 

 

    

 

 

 

Total permanent real estate loans

     62,415        62,877         64,115   

Dental construction loans

     2,033        604         388   
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     64,448        63,481         64,503   

Commercial loans

     256,607        242,910         238,319   
  

 

 

    

 

 

    

 

 

 

Gross loans

   $ 321,055      $ 306,391       $ 302,822   
  

 

 

    

 

 

    

 

 

 

Market Area

The Bank’s defined “local market area” is within the states of Oregon and Washington, west of the Cascade Mountain Range. This area is serviced by branch locations in Eugene, Oregon; Portland, Oregon; and Seattle, Washington. The Company also makes national dental loans throughout the United States. National loan relationships are maintained and serviced by Bank personnel primarily located in Portland. The following table summarizes the Company’s dental lending by borrower location:

 

     June 30,
2015
     December 31,
2014
     June 30,
2014
 

Local

   $ 156,315      $ 159,425       $ 169,102   

National

     164,740        146,966         133,720   
  

 

 

    

 

 

    

 

 

 

Total

   $ 321,055      $ 306,391       $ 302,822   
  

 

 

    

 

 

    

 

 

 

Allowance

The allowance for loan losses identified for the dental loan portfolio is established as an amount that management considers adequate to absorb possible losses on existing loans within the dental loan portfolio. The allowance related to the dental loan portfolio consists of general and specific components. The general component is based upon all dental loans collectively evaluated for impairment, including qualitative conditions associated with loan type, national location, start-up financing, practice acquisition financing, and specialty practice financing. The specific component is based upon dental loans individually evaluated for impairment.

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2015      2014      2015      2014  

Balance, beginning of period

   $ 3,912      $ 3,901      $ 4,141      $ 3,730   

Provision (reclassification)

     198        217        3        795   

Loans charged against allowance

     (42 )      (31 )      (84 )      (447

Recoveries credited to allowance

     12        49        20        58   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 4,080      $ 4,136      $ 4,080      $ 4,136   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Credit Quality

Please refer to Note 3 for additional information on the definitions of the credit quality indicators.

The following tables present the Company’s dental loan portfolio by market and credit grade at June 30, 2015, December 31, 2014, and June 30, 2014:

As of June 30, 2015

 

     Loan Grade         
     Pass      Special Mention      Substandard      Doubtful      Totals  

Local

   $ 153,911       $ —         $ 2,404       $ —         $ 156,315   

National

     161,764         —           2,976         —           164,740   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 315,675      $ —         $ 5,380       $ —         $ 321,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
As of December 31, 2014   
     Loan Grade         
     Pass      Special Mention      Substandard      Doubtful      Totals  

Local

   $ 156,589       $ —         $ 2,836       $ —         $ 159,425   

National

     144,120         —           2,846         —           146,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 300,709      $ —         $ 5,682       $ —         $ 306,391   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
As of June 30, 2014  
     Loan Grade         
     Pass      Special Mention      Substandard      Doubtful      Totals  

Local

   $ 163,049       $ —         $ 6,053       $ —         $ 169,102   

National

     132,520         —           1,200         —           133,720   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 295,569       $ —         $ 7,253       $ —         $ 302,822   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Past Due and Nonaccrual Loans

The following tables present an aged analysis of the dental loan portfolio by market, including nonaccrual loans, as of June 30, 2015, December 31, 2014, and June 30, 2014:

As of June 30, 2015

 

     30-59 Days
Past Due
Still Accruing
     60-89 Days
Past Due
Still Accruing
     Greater
Than 90 Days

Past Due
Still Accruing
     Nonaccrual      Total Past
Due and
Nonaccrual
     Total
Current
     Total Loans
Receivable
 
                    
                    

Local

   $ 331      $ —         $ —         $ 536       $ 867      $ 155,448       $ 156,315   

National

     —           —           —           —           —           164,740         164,740   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 331      $ —         $ —         $ 536       $ 867      $ 320,188       $ 321,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
As of December 31, 2014   
     30-59 Days
Past Due
Still Accruing
     60-89 Days
Past Due

Still Accruing
     Greater
Than 90 Days
Past Due
Still Accruing
     Nonaccrual      Total Past 
Due and
Nonaccrual
     Total
Current
     Total Loans
Receivable
 
                    
                    
                    

Local

   $ 327       $ —         $ —         $ 597       $ 924       $ 158,501       $ 159,425   

National

     —           —           —           —           —           146,966         146,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 327       $ —         $ —         $ 597       $ 924       $ 305,467       $ 306,391   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
As of June 30, 2014   
     30-59 Days
Past Due
Still Accruing
     60-89 Days
Past Due
Still Accruing
     Greater
Than 90 Days

Past Due
Still Accruing
     Nonaccrual      Total Past
Due and
Nonaccrual
     Total
Current
     Total Loans
Receivable
 
                    
                    

Local

   $ —         $ —         $ —         $ 1,028       $ 1,028       $ 168,074       $ 169,102   

National

     —           —           —           222         222         133,498         133,720   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ —         $ 1,250       $ 1,250       $ 301,572       $ 302,822   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTE 5 – FEDERAL FUNDS AND OVERNIGHT FUNDS PURCHASED

At June 30, 2015, the Company had unsecured federal funds borrowing lines with various correspondent banks totaling $129,000. At June 30, 2015, December 31, 2014, and June 30, 2014, there was $5,500, $0, and $6,410, respectively outstanding on these lines.

The Company also has a secured overnight borrowing line available from the Federal Reserve Bank of San Francisco (“FRB”) that totaled $71,190, $65,084 and $101,122 at June 30, 2015, December 31, 2014, and June 30, 2014, respectively. At June 30, 2015, the FRB borrowing line was secured by the pledge of approximately $132,032 of commercial loans under the Company’s Borrower-In-Custody program. At June 30, 2015, December 31, 2014, and June 30, 2014, there were no outstanding borrowings on this line.

NOTE 6 – FEDERAL HOME LOAN BANK BORROWINGS

The Company has a borrowing limit with the Federal Home Loan Bank of Des Moines (“FHLB”) equal to 35% of total assets, subject to the value of discounted collateral pledged. On June 1, 2015, the FHLB Des Moines announced the completion of its merger with the FHLB Seattle effective May 31, 2015. At that time, the combined entity repurchased excess stock above what was needed to support borrowings, resulting in a reduction of outstanding FHLB stock.

At June 30, 2015, the maximum borrowing line was $640,830; however, the FHLB borrowing line was limited by the discounted value of collateral pledged. At June 30, 2015, the Company had pledged $604,157 in real estate loans to the FHLB that had a discounted value of $400,600. There was $84,000 borrowed on this line at June 30, 2015.

At December 31, 2014, the maximum FHLB borrowing line was $451,298, and the Company had pledged real estate loans and securities to the FHLB with a discounted value of $318,854. There was $96,000 borrowed on this line at December 31, 2014.

At June 30, 2014, the maximum FHLB borrowing line was $449,629, and the Company had pledged real estate loans and securities to the FHLB with a discounted collateral value of $284,453. There was $164,500 borrowed on this line at June 30, 2014.

Below is a summary of outstanding FHLB borrowings by maturity.

 

     Current
Rates
  June 30,
2015
 
    

Cash management advance

   NA   $ —     

2014

   —       —     

2015

   0.29% - 1.60%     56,500   

2016

   1.84% - 2.36%     22,500   

2017

   2.28%     3,000   

2018

   —       —     

2019

   —       —     

Thereafter

   3.85%     2,000   
    

 

 

 
     $ 84,000   
    

 

 

 

 

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Table of Contents

NOTE 7 – SHARE-BASED COMPENSATION

The Company’s 2006 Stock Option and Equity Compensation Plan (the “2006 SOEC Plan”) authorizes the award of up to 1,550,000 shares in share-based awards. The awards granted under this plan are performance-based and are subject to vesting. The Compensation Committee of the Board of Directors may impose any terms or conditions on the vesting of an award that it determines to be appropriate. Awards granted generally vest over four years and have a maximum life of ten years. Awards may be granted at exercise prices of not less than 100% of the fair market value of the Company’s common stock at the grant date.

Pursuant to the 2006 SOEC Plan, incentive stock options (“ISOs”), nonqualified stock options, restricted stock, restricted stock units (“RSUs”), or stock appreciation rights (“SARs”) may be awarded to attract and retain the best available personnel to the Company and its subsidiaries. SARs may be settled in common stock or cash as determined at the date of issuance. Liability-based awards (including all cash-settled SARs) have no impact on the number of shares available to be issued within the plan. Additionally, non-qualified option awards and restricted stock awards may be granted to directors under the terms of this plan.

Prior to April 2006, ISO and non-qualified stock option awards were granted to employees and directors under the Company’s 1999 Employees’ Stock Option Plan and the Company’s 1999 Directors’ Stock Option Plan. The Company has stock options outstanding under both of these plans. Subsequent to the annual shareholders’ meeting in April 2006, all shares available under these plans were deregistered and are no longer available for future grants.

For the six months ended June 30, 2015, 19,185 restricted shares were granted and issued to directors with no restrictions imposed. Additionally, 155,898 RSUs were granted to employees during the first six months of 2015. Of the 155,898 RSUs granted, 7,052 cliff vest on January 1, 2019, 148,460 vest over four years, and 386 vested immediately. Shares of common stock will be issued as soon as practicable upon vesting. For the six months ended June 30, 2014, 14,996 restricted shares were granted and issued to directors with no restrictions imposed. Additionally, 127,051 RSUs were granted to employees during the first six months of 2014. Of the 127,051 RSUs granted, 116,771 vest over four years, 9,902 vest over two years, and 378 vested immediately. No other awards were granted during the six months ended June 30, 2015 and 2014.

The following table summarizes the shares and the aggregate grant-date fair market values of the equity-based awards granted during the six months ended June 30, 2015:

 

     Six months ended  
     June 30,
2015
     June 30,
2014
 
     Shares      Grant Date
Fair Market
Value
     Shares      Grant Date
Fair Market
Value
 

Equity-based awards:

           

Director restricted stock

     19,185       $ 248         14,996       $ 200   

Employee stock options

     —           —           —           —     

Employee stock SARs

     —           —           —           —     

Employee RSUs

     155,898         2,206         127,051         1,679   
  

 

 

    

 

 

    

 

 

    

 

 

 
     175,083       $ 2,454         142,047       $ 1,879   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table provides a summary of the Company’s RSU activity, including the weighted average grant date fair value per share, for the six months ended June 30, 2015:

 

     Six months ended  
     June 30, 2015  
     Non-Vested
Restricted Stock
Units
     Weighted Average
Grant Date Fair
Value
 

Balance, beginning of period

   $ 306,532       $ 11.18   

Granted

     155,898         13.00   

Vested shares issued

     (75,373      10.59   

Vested shares surrendered for taxes

     (46,105      10.59   

Forfeited or expired

     (4,847      11.86   
  

 

 

    

Balance, end of period

   $ 336,105       $ 12.23   
  

 

 

    

The following table identifies the compensation expense recorded and tax benefits received by the Company on its share-based compensation plans for the three and six months ended June 30, 2015, and 2014:

 

     Three months ended  
     June 30,  
     2015      2014  
     Compensation
Expense
(Income)
     Tax Benefit
(expense)
     Compensation
Expense
     Tax Benefit  

Equity-based awards:

           

Director restricted stock

   $ 248       $ 94       $ 200       $ 76   

Employee RSUs

     376         143         331         126   

Liability-based awards:

           

Employee cash SARs

     (50      (19      15         6   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 574      $ 218       $ 546       $ 208   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Six months ended  
     June 30,  
     2015      2014  
     Compensation
Expense
(Income)
     Tax Benefit
(expense)
     Compensation
Expense
     Tax Benefit  

Equity-based awards:

           

Director restricted stock

   $ 248       $ 94       $ 200       $ 76   

Employee stock options

     —           —           13         —     

Employee stock SARs

     —           —           26         10   

Employee RSUs

     708         269         561         213   

Liability-based awards:

           

Employee cash SARs

     (50      (19      70         27   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 906       $ 344       $ 870       $ 326   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table identifies stock options, employee stock SARs, and employee cash SARs exercised during the three and six months ended June 30, 2015:

 

     Three months ended  
     June 30, 2015  
     Number
Exercised
     Weighted
Average
Exercise
Price
     Intrinsic
Value
     Number of
Shares

Issued
     Net Cash
Payment to
Employees
 

Stock options

     —         $ —         $ —           —           NA   

Employee stock SARs

     600       $ 11.30       $ 1         52         NA   

Employee cash SARs

     —         $ —           NA         NA       $ —     
     Six months ended  
     June 30, 2015  
     Number
Exercised
     Weighted
Average
Exercise
Price
     Intrinsic
Value
     Number of
Shares
Issued
     Net Cash
Payment to
Employees
 

Stock options

     1,102       $ 12.25       $ 2         1,102         NA   

Employee stock SARs

     1,213       $ 11.50       $ 1         92         NA   

Employee cash SARs

     208       $ 12.07         NA         NA       $ —     

The following table identifies stock options, employee stock SARs, and employee cash SARs exercised during the three and six months ended June 30, 2014:

 

     Three months ended  
     June 30, 2014  
     Number
Exercised
     Weighted
Average
Exercise
Price
     Intrinsic
Value
     Number of
Shares
Issued
     Net Cash
Payment to
Employees
 

Stock options

     —         $ —         $ —           —           NA   

Employee stock SARs

     1,961       $ 11.53       $ 3         189         NA   

Employee cash SARs

     2,219       $ 12.07         NA         NA       $ 3   
     Six months ended  
     June 30, 2014  
     Number
Exercised
     Weighted
Average
Exercise
Price
     Intrinsic
Value
     Number of
Shares
Issued
     Net Cash
Payment to
Employees
 

Stock options

     16,779       $ 11.29       $ 57         —           NA   

Employee stock SARs

     14,140       $ 11.86       $ 25         1,629         NA   

Employee cash SARs

     6,445       $ 12.21         NA         NA       $ 8   

No liability-based or equity-based awards vested during the six months ended June 30, 2014.

At June 30, 2015, the Company had estimated unrecognized compensation expense of approximately $3,337 for unvested RSUs. These amounts are based on historical forfeiture rates of 13.00% for all RSUs granted to employees. The weighted-average period of time the unrecognized compensation expense will be recognized for the unvested RSUs was approximately 2.94 years as of June 30, 2015.

 

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NOTE 8 - FAIR VALUE

The following table presents estimated fair values of the Company’s financial instruments as of June 30, 2015, December 31, 2014, and June 30, 2014, in accordance with the provisions of FASB ASC 825 “Financial Instruments.” The use of different assumptions and estimation methods could have a significant effect on the reported fair value amounts. Accordingly, the estimates of fair value herein are not necessarily indicative of the amounts that might be realized in a current market exchange.

 

     June 30, 2015      December 31, 2014      June 30, 2014  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

                 

Cash and cash equivalents

   $ 39,602       $ 39,602      $ 25,787      $ 25,787       $ 43,443       $ 43,443   

Securities available-for-sale

     383,618         383,618        351,946         351,946         344,645         344,645   

Loans

     1,304,932         1,289,072        1,045,021        1,033,254         1,030,021         1,015,721   

Federal Home Loan Bank stock

     5,468         5,468        10,019        10,019         10,227         10,227   

Interest receivable

     5,833         5,833        4,773        4,773         5,101         5,101   

Bank-owned life insurance

     22,571         22,571        16,609        16,609         16,370         16,370   

Swap derivative

     117         117        176        176         218         218   

Financial liabilities:

                 

Deposits

   $ 1,514,181       $ 1,514,255      $ 1,209,093      $ 1,209,240       $ 1,132,654       $ 1,132,917   

Federal funds and overnight funds purchased

     5,500         5,500        —           —           6,410         6,410   

Federal Home Loan Bank borrowings

     84,000         84,587        96,000        96,721         164,500         165,502   

Junior subordinated debentures

     8,248         2,494        8,248        2,410         8,248         2,326   

Interest payable

     170         170        176        176         170         170   

 

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Cash and cash equivalents – The carrying amount approximates fair value.

Securities available-for-sale– Fair value is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans – For variable rate loans that reprice frequently and have no significant change in credit risk, fair value is based on carrying values. Fair value of fixed rate loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable, and consider credit risk. The Company uses an independent third-party to establish the fair value of loans.

Federal Home Loan Bank stock – The carrying amount represents the fair value and value at which FHLB of Des Moines would redeem the stock.

Interest receivable and payable– The carrying amounts of accrued interest receivable and payable approximate their fair value.

Bank-owned life insurance – The carrying amount is based on cash surrender value which approximates fair value.

Swap derivative – Fair value is based on quoted market prices.

Deposits – Fair value of demand, interest bearing demand and savings deposits is the amount payable on demand at the reporting date. Fair value of time deposits is estimated using the interest rates currently offered for deposits of similar remaining maturities. The Company uses an independent third-party to establish the fair value of time deposits.

Federal funds and overnight funds purchased – The carrying amount is a reasonable estimate of fair value because of the short-term nature of these borrowings.

Federal Home Loan Bank borrowings – Fair value of Federal Home Loan Bank borrowings is estimated by discounting future cash flows at rates currently available for debt with similar terms and remaining maturities.

Junior subordinated debentures – Fair value of junior subordinated debentures is estimated by discounting future cash flows at rates currently available for debt with similar credit risk, terms and remaining maturities.

Off-balance sheet financial instruments – The carrying amount and fair value are based on fees charged for similar commitments and are not material.

The Company also adheres to the FASB guidance with regards to ASC 820, “Fair Value Measures.” This guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement requires fair value measurement disclosure of all assets and liabilities that are carried at fair value on either a recurring or nonrecurring basis. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available. The valuation techniques used are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

 

    Level 1 – Quoted prices for identical instruments in active markets.

 

    Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

    Level 3 – Unobservable inputs are used to measure fair value to the extent that observable inputs are not available. The Company’s own data used to develop unobservable inputs is adjusted for market consideration when reasonably available.

 

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

The following table presents information about the level in the fair value hierarchy for the Company’s assets and liabilities not measured and carried at fair value as of June 30, 2015, December 31, 2014, and June 30, 2014:

 

     Carrying
Amount
     Fair Value at June 30, 2015  
        Level 1      Level 2      Level 3  

Financial assets:

           

Cash and cash equivalents

   $ 39,602       $ 39,602      $ —         $ —     

Loans

     1,304,932         —           —           1,289,072   

Federal Home Loan Bank stock

     5,468         5,468        —           —     

Interest receivable

     5,833         5,833        —           —     

Financial liabilities:

           

Deposits

   $ 1,514,181       $ —         $ 1,514,255       $ —     

Federal funds and overnight funds purchased

     5,500         5,500        —           —     

Federal Home Loan Bank borrowings

     84,000         —           84,587         —     

Junior subordinated debentures

     8,248         —           2,494         —     

Interest payable

     170         170         —           —     

 

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     Carrying
Amount
     Fair Value at December 31, 2014  
        Level 1      Level 2      Level 3  

Financial assets:

           

Cash and cash equivalents

   $ 25,787       $ 25,787       $ —         $ —     

Loans

     1,045,021         —           —           1,033,254   

Federal Home Loan Bank stock

     10,019         10,019         —           —     

Interest payable

     4,773         4,773         —           —     

Financial liabilities:

           

Deposits

   $ 1,209,093       $ —         $ 1,209,240       $ —     

Federal funds and overnight funds purchased

     —           —           —           —     

Federal Home Loan Bank borrowings

     96,000         —           96,721         —     

Junior subordinated debentures

     8,248         —           2,410         —     

Interest payable

     176         176         —           —     
     Carrying
Amount
     Fair Value at June 30, 2014  
        Level 1      Level 2      Level 3  

Financial assets:

           

Cash and cash equivalents

   $ 43,443       $ 43,443       $ —         $ —     

Loans

     1,030,021         —           —           1,015,721   

Federal Home Loan Bank stock

     10,227         10,227         —           —     

Interest payable

     5,101         5,101         —           —     

Financial liabilities:

           

Deposits

   $ 1,132,654       $ —         $ 1,132,917       $ —     

Federal funds and overnight funds purchased

     6,410         6,410         —           —     

Federal Home Loan Bank borrowings

     164,500         —           165,502         —     

Junior subordinated debentures

     8,248         —           2,326         —     

Interest payable

     170         170         —           —     

 

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The tables below show assets measured at fair value on a recurring basis as of June 30, 2015, December 31, 2014, and June 30, 2014:

 

     Carrying      Fair Value at June 30, 2015  
     Value      Level 1      Level 2      Level 3  

Available-for-sale securities

           

Obligations of U.S. government agencies

   $ 55,796       $ —         $ 55,796       $ —     

Obligations of states and political subdivisions

     87,387         —           87,387         —     

Mortgage-backed securities

     202,114         —           202,114         —     

Private-label mortgage-backed securities

     3,334         —           1,551         1,783   

SBA pools

     34,089         —           34,089         —     

Corporate securities

     898         —           898         —     

Swap derivative

     117         117         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured on a recurring basis

   $ 383,735       $ 117       $ 381,835       $ 1,783   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Carrying      Fair Value at December 31, 2014  
     Value      Level 1      Level 2      Level 3  

Available-for-sale securities

           

Obligations of U.S. government agencies

   $ 39,185       $ —         $ 39,185       $ —     

Obligations of states and political subdivisions

     83,981         —           83,981         —     

Mortgage-backed securities

     205,390         —           205,390         —     

Private-label mortgage-backed securities

     3,816         —           2,248         1,568   

SBA pools

     19,574         —           19,574         —     

Swap derivative

     176         176         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured on a recurring basis

   $ 352,122       $ 176       $ 350,378       $ 1,568   
  

 

 

    

 

 

    

 

 

    

 

 

 
            Fair Value at June 30, 2014  
     Value      Level 1      Level 2      Level 3  

Available-for-sale securities

           

Obligations of U.S. government agencies

   $ 37,162       $  —         $ 37,162       $ —     

Obligations of states and political subdivisions

     81,680         —           81,680         —     

Mortgage-backed securities

     212,720         —           212,720         —     

Private-label mortgage-backed securities

     4,443         —           2,750         1,693   

SBA pools

     8,640         —           8,640         —     

Swap derivative

     218         218         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured on a recurring basis

   $ 344,863       $ 218       $ 342,952       $ 1,693   
  

 

 

    

 

 

    

 

 

    

 

 

 

No transfers to or from Levels 1 and 2 occurred on assets measured at fair value on a recurring basis during the six months ended June 30, 2015, and 2014, or during the year ended December 31, 2014.

 

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The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a recurring basis. Fair value for all classes of available-for-sale securities is estimated by obtaining quoted market prices for identical assets, where available. If such prices are not available, fair value is based on independent asset pricing services and models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, prepayments, defaults, cumulative loss projections, and cash flows. Fair value of the swap derivative is determined by FTN Financial, and represents an active price quote which it would pay or the Bank would be charged to leave the swap early. There have been no significant changes in the valuation techniques during the periods reported.

The following table provides a reconciliation of private-label mortgage-backed securities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three and six months ended June 30, 2015, and 2014:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2015      2014      2015      2014  

Beginning balance

   $ 1,545       $ 1,774       $ 1,568       $ 1,786   

Transfers from level 2

     300         —           300         —     

Transfers out of Level 3

     —           —           —           —     

Total gains or losses

           

Included in earnings

     (13      —           (13      —     

Included in other comprehensive income

     29         (61      68         (11

Paydowns

     (78      (20      (140      (82

Purchases, issuances, sales and settlements

           

Purchases

     —           —           —           —     

Issuances

     —           —           —           —     

Sales

     —           —           —           —     

Settlements

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 1,783       $ 1,693       $ 1,783       $ 1,693   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company utilizes FTN Financial as a third-party pricing service to estimate fair value on all of its available-for-sale securities. The inputs used to value all securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data, including market research, market indicators, and industry and economic trends. Additional inputs specific to each asset type are as follows:

 

    Obligations of U.S. government agencies – TRACE reported trades.

 

    Obligations of states and political subdivisions – MSRB reported trades, material event notices, and Municipal Market Data (MMD) benchmark yields.

 

    Private-label mortgage-backed securities – new issue data, monthly payment information, and collateral performance (whole loan collateral).

 

    Mortgage-backed securities – TBA prices and monthly payment information.

 

    SBA variable pools – TBA prices and monthly payment information.

Inputs may be prioritized differently on any given day for any security and not all inputs listed are available for use in the evaluation process on any given day for each security evaluation.

 

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Table of Contents

The valuation methodology used by asset type includes:

 

    Obligations of U.S. government agencies – security characteristics, defined sector break-down, benchmark yields, applied base spread, yield to maturity (bullet structures), corporate action adjustment, and evaluations based on T+3 settlement.

 

    Obligations of states and political subdivisions – security characteristics, benchmark yield