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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, 2016.

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, 2016 was 19,731,925.

 

 

 


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      43   
ITEM 3   Quantitative and Qualitative Disclosures about Market Risk      66   
ITEM 4   Controls and Procedures      66   
PART II   OTHER INFORMATION      67   
ITEM 1   Legal Proceedings      67   
ITEM 1A   Risk Factors      68   
ITEM 2   Unregistered Sales of Equity Securities and Use of Proceeds      70   
ITEM 3   Defaults upon Senior Securities      70   
ITEM 4   Mine Safety Disclosures      70   
ITEM 5   Other Information      70   
ITEM 6   Exhibits      70   

 

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,
2016
    December 31,
2015
 

ASSETS

    

Cash and due from banks

   $ 25,238      $ 23,819   

Interest-bearing deposits with banks

     18,151        12,856   
  

 

 

   

 

 

 

Total cash and cash equivalents

     43,389        36,675   

Securities available-for-sale

     396,230        366,598   

Loans, net of deferred fees

     1,484,152        1,404,482   

Allowance for loan losses

     (19,127     (17,301
  

 

 

   

 

 

 

Net loans

     1,465,025        1,387,181   

Interest receivable

     6,334        5,721   

Federal Home Loan Bank stock

     8,351        5,208   

Property and equipment, net of accumulated depreciation

     19,086        18,014   

Goodwill and intangible assets

     43,684        43,159   

Deferred tax asset

     2,797        5,670   

Other real estate owned

     12,108        11,747   

Bank-owned life insurance

     23,174        22,884   

Other assets

     5,232        6,621   
  

 

 

   

 

 

 

Total assets

   $ 2,025,410      $ 1,909,478   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits

    

Noninterest-bearing demand

   $ 624,146      $ 568,688   

Savings and interest-bearing checking

     826,854        889,802   

Core time deposits

     57,019        75,452   
  

 

 

   

 

 

 

Total core deposits

     1,508,019        1,533,942   

Other deposits

     92,113        63,151   
  

 

 

   

 

 

 

Total deposits

     1,600,132        1,597,093   

Repurchase agreements

     1,029        71   

Federal Home Loan Bank borrowings

     151,500        77,500   

Subordinated debentures

     34,092        —     

Junior subordinated debentures

     8,248        8,248   

Accrued interest and other payables

     3,983        8,075   
  

 

 

   

 

 

 

Total liabilities

     1,798,984        1,690,987   
  

 

 

   

 

 

 

Shareholders’ equity

    

Common stock, shares authorized: 50,000,000; shares issued and outstanding: 19,731,925 at June 30, 2016, and 19,604,182 at December 31, 2015

     156,678        156,099   

Retained earnings

     63,431        59,693   

Accumulated other comprehensive income

     6,317        2,699   
  

 

 

   

 

 

 
     226,426        218,491   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,025,410      $ 1,909,478   
  

 

 

   

 

 

 

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     Six months ended  
     June 30,     June 30,  
     2016     2015     2016     2015  

Interest and dividend income

        

Loans

   $ 17,951      $ 16,594      $ 35,665      $ 30,780   

Taxable securities

     1,838        1,736        3,555        3,112   

Tax-exempt securities

     476        499        952        1,002   

Interest-bearing deposits with banks

     19        11        64        16   
  

 

 

   

 

 

   

 

 

   

 

 

 
     20,284        18,840        40,236        34,910   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Deposits

     797        845        1,694        1,655   

Federal Home Loan Bank borrowings

     282        239        471        468   

Junior subordinated debentures

     56        56        113        112   

Federal funds purchased

     2        4        4        5   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,137        1,144        2,282        2,240   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     19,147        17,696        37,954        32,670   

Provision for loan losses

     1,950        550        2,195        550   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     17,197        17,146        35,759        32,120   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Service charges on deposit accounts

     688        661        1,381        1,236   

Bankcard income

     294        214        585        411   

Bank-owned life insurance income

     145        170        291        279   

Net gain on sale of investment securities

     71        139        309        192   

Impairment losses on investment securities (OTTI)

     —          (13     (17     (13

Other noninterest income

     549        456        1,008        798   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,747        1,627        3,557        2,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and employee benefits

     8,005        6,744        15,564        13,153   

Property and equipment

     1,087        1,094        2,202        2,073   

Data processing

     893        821        1,758        1,505   

Legal and professional services

     1,140        739        1,752        1,138   

Business development

     516        411        1,032        765   

FDIC insurance assessment

     286        273        574        486   

Other real estate (income) expense, net

     (113     (60     (103     181   

Merger related expense

     1,978        —          1,978        1,836   

Other noninterest expense

     1,140        1,008        2,183        1,867   
  

 

 

   

 

 

   

 

 

   

 

 

 
     14,932        11,030        26,940        23,004   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     4,012        7,743        12,376        12,019   

Provision for income taxes

     1,406        2,648        4,311        4,122   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 2,606      $ 5,095      $ 8,065      $ 7,897   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic

   $ 0.13      $ 0.26      $ 0.41      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.13      $ 0.26      $ 0.41      $ 0.41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     19,697,314        19,562,363        19,652,231        18,900,895   

Common stock equivalents attributable to stock-based awards

     171,653        226,521        153,667        227,090   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     19,868,967        19,788,884        19,805,898        19,127,985   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2016     2015     2016     2015  

Net income

   $ 2,606      $ 5,095      $ 8,065      $ 7,897   

Other comprehensive income:

        

Available-for-sale securities:

        

Unrealized gain (loss) arising during the period

     2,856        (2,874     7,327        (191

Reclassification adjustment for gains realized in net income

     (71     (139     (309     (192

Other than temporary impairment

     —          13        17        13   

Income tax effects

     (1,086     1,170        (2,744     144   

Derivative agreements—cash flow hedge

        

Unrealized (loss) gain arising during the period

     (921     64        (1,103     (59

Income tax effects

     359        (25     430        23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) , net of tax

     1,137        (1,791     3,618        (262
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 3,743      $ 3,304      $ 11,683      $ 7,635   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except share, and per share amounts)

(Unaudited)

 

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

Balance, December 31, 2014

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          18,751          18,751   

Other comprehensive loss, net of tax

            (1,103     (1,103
         

 

 

   

 

 

 

Comprehensive income

              17,648   
           

 

 

 

Stock issuance and related tax benefit

     108,404         95            95   

Stock issued through acquisition

     1,778,102         23,578            23,578   

Share-based compensation expense

        1,700            1,700   

Vested employee RSUs and SARs surrendered to cover tax consequences

        (649         (649

Cash dividends ($0.42 per share)

          (8,042       (8,042
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2015

     19,604,182       $ 156,099      $ 59,693      $ 2,699      $ 218,491   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          8,065          8,065   

Other comprehensive income, net of tax

            3,618        3,618   
         

 

 

   

 

 

 

Comprehensive income

              11,683   
           

 

 

 

Stock issuance and related tax benefit

     127,743         392            392   

Share-based compensation expense

        1,030            1,030   

Vested employee RSUs and SARs surrendered to cover tax consequences

        (843         (843

Cash dividends ($0.22 per share)

          (4,327       (4,327
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2016

     19,731,925       $ 156,678      $ 63,431      $ 6,317      $ 226,426   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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,
 
     2016     2015  

Cash flows from operating activities:

    

Net income

   $ 8,065      $ 7,897   

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

    

Depreciation and amortization, net of accretion

     3,118        3,678   

Deferred income taxes

     3        —     

Bank-owned life insurance income

     (291     (279

Share-based compensation

     1,030        906   

Provision for loan losses

     2,195        550   

Gain on sale of investment securities

     (309     (192

Valuation adjustment on foreclosed assets

     9        52   

Gain on sale of foreclosed assets

     (173     (25

Other than temporary impairment on investment securities

     17        13   

Change in:

    

Interest receivable

     (613     (513

Deferred loan fees

     422        225   

Accrued interest payable and other liabilities

     (3,461     1,019   

Income tax receivable

     —          553   

Other assets

     (558     (661
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,454        13,223   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

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

     69,976        40,935   

Purchase of available-for-sale investment securities

     (94,611     (49,579

Net loan principal originations

     (81,466     (57,023

Proceeds from sale of foreclosed assets

     808        1,645   

Net purchase of property and equipment

     (1,615     (552

(Purchase)/redemption of Federal Home Loan Bank stock

     (3,143     5,178   

Cash consideration paid, net of cash acquired in merger

     —          (3,249
  

 

 

   

 

 

 

Net cash used by investing activities

     (110,051     (62,645
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Change in deposits

     3,039        77,121   

Change in repurcahse agreements

     958        275   

Change in federal funds purchased and Federal Home Loan Bank short-term borrowings

     74,000        (6,500

Proceeds from stock options exercised

     354        13   

Excess tax benefit from stock options exercised

     38        —     

Redemption of Capital Pacific Bell State Bank Debt

     —          (3,344

Proceeds from subordinated debenture issuance

     34,092        —     

Dividends paid

     (4,327     (3,731

Vested employee RSUs and SARs surrendered to cover tax consequences

     (843     (597
  

 

 

   

 

 

 

Net cash provided by financing activities

     107,311        63,237   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     6,714        13,815   

Cash and cash equivalents, beginning of period

     36,675        25,787   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 43,389      $ 39,602   
  

 

 

   

 

 

 

Supplemental information:

    

Noncash investing and financing activities:

    

Transfer of loans to other real estate owned

   $ 1,005      $ 964   

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

   $ 4,291      $ (226

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

   $ (673   $ (36

Acquisitions:

    

Assets acquired

   $ —        $ 259,482   

Liabilities assumed

   $ —        $ 235,904   

Cash paid during the period for:

    

Income taxes

   $ 6,417      $ 788   

Interest

   $ 2,340      $ 2,134   

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 2015 Form 10-K filed March 14, 2016. 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, 2015, was derived from audited consolidated financial statements, but does not include all disclosures contained in the Company’s 2015 Form 10-K. The interim consolidated financial statements should be read in conjunction with the December 31, 2015, consolidated financial statements, including the notes thereto, included in the Company’s 2015 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, 2016, were as follows:

 

            Gross      Gross     Estimated      Percentage  
     Amortized      Unrealized      Unrealized     Fair      of  
     Cost      Gains      Losses     Value      Portfolio  
Unrealized Loss Positions              

Private-label mortgage-backed securities

   $ 318       $ —         $ (31   $ 287         0.07

Mortgage-backed securities

     7,219         —           (51     7,168         1.81

SBA pools

     13,085         —           (101     12,984         3.28

Corporate securities

     900         —           (11     888         0.22
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 21,522       $ —         $ (194   $ 21,327         5.38
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
Unrealized Gain Positions              

Obligations of U.S. government agencies

   $ 25,295       $ 1,358       $ —        $ 26,653         6.73

Obligations of states and political subdivisions

     94,533         5,544         —          100,077         25.26

Private-label mortgage-backed securities

     1,860         99         —          1,959         0.49

Mortgage-backed securities

     216,657         4,325         —          220,982         55.77

SBA pools

     24,987         245         —          25,232         6.37
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 363,332       $ 11,571       $ —        $ 374,903         94.62
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 384,854       $ 11,571       $ (194   $ 396,230         100.00
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2016, the Bank held 434 investment securities, of which 17 were in unrealized loss positions. Unrealized losses existed on certain securities classified as private-label mortgage-backed securities, mortgage-backed securities, SBA pools and corporate securities. The unrealized losses on all securities are 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 not due to concerns regarding the underlying credit of the issuers or the underlying collateral. The decline in value of these securities has resulted from changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not currently intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2016.

 

9


Table of Contents

The following table presents a summary of securities in a continuous unrealized loss position at June 30, 2016:

 

     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
 

Private-label mortgage-backed securities

   $ 56       $ —         $ 231       $ (31

Mortgage-backed securities

     3,348         (11      3,820         (40

SBA pools

     9,134         (58      3,850         (43

Corporate securities

     888         (11      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,426       $ (80    $ 7,901       $ (114
  

 

 

    

 

 

    

 

 

    

 

 

 

On a monthly basis, management reviews all private-label mortgage-backed securities for the presence of other than temporary impairment, (“OTTI”) and recorded $0 and $13 during the three months ended June 30, 2016 and 2015, respectively. Management’s evaluation included the use of independently-generated third-party credit surveillance reports that analyze 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, 2016, and 2015:

 

     Three months ended      Six months ended  
     June 30,      June 30,  
     2016      2015      2016      2015  

Balance, beginning of period:

   $ 266       $ 227       $ 249       $ 227   

Additions:

           

Initial OTTI credit loss

     —           13         17         13   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period:

   $ 266       $ 240       $ 266       $ 240   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2016 and December 31, 2015, seven of the Company’s private-label mortgage-backed securities, with an amortized cost of $1,473, and $1,506, respectively, were classified as substandard as their underlying credit was considered impaired.

At June 30, 2016, and December 31, 2015, the projected average life of the securities portfolio was 4.66 years and 4.21 years, respectively.

 

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Table of Contents

The amortized cost and estimated fair values of securities available-for-sale at December 31, 2015, were as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
     Percentage
of
Portfolio
 
Unrealized Loss Positions              

Obligations of U.S. government agencies

   $ 14,491       $ —         $ (119   $ 14,372         3.92

Obligations of states and political subdivisions

     13,438         —           (149     13,289         3.62

Private-label mortgage-backed securities

     663         —           (33     630         0.17

Mortgage-backed securities

     95,040         —           (856     94,184         25.69

SBA pools

     17,225         —           (101     17,124         4.67

Corporate securities

     899         —           (5     893         0.24
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 141,756       $ —         $ (1,263   $ 140,492         38.32
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
Unrealized Gain Positions              

Obligations of U.S. government agencies

   $ 29,669       $ 582       $ —        $ 30,251         8.25

Obligations of states and political subdivisions

     80,119         3,743         —          83,862         22.88

Private-label mortgage-backed securities

     2,028         131         —          2,159         0.59

Mortgage-backed securities

     90,126         1,060         —          91,186         24.87

SBA pools

     18,560         88         —          18,648         5.09
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 220,502       $ 5,604       $ —        $ 226,106         61.68
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 362,258       $ 5,604       $ (1,263   $ 366,598         100.00
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

At December 31, 2015, the Bank held 432 investment securities, of which 92 were in unrealized loss positions. The following table presents a summary of securities in a continuous unrealized loss position at December 31, 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

   $ 14,372       $ (119    $ —         $ —     

Obligations of states and political subdivisions

     12,761         (145      528         (4

Private-label mortgage-backed securities

     240         (4      390         (29

Mortgage-backed securities

     87,896         (711      6,288         (145

SBA pools

     13,539         (78      3,585         (23

Corporate securities

     893         (5      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 129,701       $ (1,062    $ 10,791       $ (201
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The amortized cost and estimated fair value of securities at June 30, 2016, by maturity, are shown below. Obligations of U.S. government agencies, states and political subdivisions and corporate securities are shown by contractual maturity. Mortgage-backed securities and SBA variable pools are shown by projected average life.

 

     June 30, 2016  
     Amortized
Cost
     Estimated
Fair

Value
 

Due in one year or less

   $ 9,119       $ 9,196   

Due after one year through 5 years

     195,419         199,157   

Due after 5 years through 10 years

     140,032         145,656   

Due after 10 years

     40,284         42,221   
  

 

 

    

 

 

 
   $ 384,854       $ 396,230   
  

 

 

    

 

 

 

During the quarter ended June 30, 2016, 22 investment securities were sold resulting in proceeds of $35,781. The sales generated a gross gain of $315 and a gross loss of $244, totaling a net gain of $71. During the year ended June 30, 2016, 28 investment securities were sold resulting in proceeds of $44,751. The sales generated a gross gain of $555 and a gross loss of $247, totaling a net gain of $308. The specific identification method was used to determine the cost of the securities sold.

During second quarter 2015, 13 investment securities were sold resulting in proceeds of $7,574. The sales generated a gross gain of $200 and a gross loss of $61, totaling a net gain of $139. During the year ended June 30, 2015, 22 investment securities were sold resulting in proceeds of $14,169. The sales generated a gross gain of $310 and a gross loss of $118, totaling a net gain of $192. The specific identification method was used to determine the cost of the securities sold.

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

 

     June 30, 2016      December 31, 2015  
     Amortized
Cost
     Estimated
Fair
Value
     Amortized
Cost
     Estimated
Fair
Value
 

Pledged to secure public deposits

   $ 25,628       $ 27,082       $ 27,938       $ 29,052   

Pledged to secure repurchase agreements

     1,694         1,781         3,985         4,111   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 27,322       $ 28,863       $ 31,923       $ 33,163   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2016, and December 31, 2015, there was an outstanding balance for repurchase agreements of $1,029, and $71, respectively.

 

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Table of Contents

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  
     2016     Loans     2015     Loans  

Real estate loans

        

Multi-family residential

   $ 66,403        4.47   $ 66,445        4.73

Residential 1-4 family

     51,652        3.48     53,776        3.82

Owner-occupied commercial

     375,911        25.30     364,742        25.94

Nonowner-occupied commercial

     339,444        22.84     300,774        21.39
  

 

 

   

 

 

   

 

 

   

 

 

 

Total permanent real estate loans

     833,410        56.09     785,737        55.88

Construction loans

        

Multi-family residential

     16,743        1.13     7,027        0.50

Residential 1-4 family

     34,372        2.31     30,856        2.19

Commercial real estate

     57,790        3.89     42,680        3.04

Commercial bare land and acquisition & development

     10,551        0.71     20,537        1.46

Residential bare land and acquisition & development

     6,658        0.45     7,268        0.52
  

 

 

   

 

 

   

 

 

   

 

 

 

Total construction real estate loans

     126,114        8.49     108,368        7.71
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     959,524        64.58     894,105        63.59

Commercial loans

     518,529        34.88     501,976        35.70

Consumer loans

     3,313        0.22     3,351        0.24

Other loans

     4,737        0.32     6,580        0.47
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans

     1,486,103        100.00     1,406,012        100.00

Deferred loan origination fees

     (1,951       (1,530  
  

 

 

     

 

 

   
     1,484,152          1,404,482     

Allowance for loan losses

     (19,127       (17,301  
  

 

 

     

 

 

   

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

   $ 1,465,025        $ 1,387,181     
  

 

 

     

 

 

   

At June 30, 2016, outstanding loans to dental professionals totaled $369,810 and represented 24.88% of total outstanding loans compared to dental professional loans of $340,162 or 24.19% of total loans at December 31, 2015. Additional information about the Company’s dental portfolio can be found in Note 4. There are no other industry concentrations in excess of 10% of the total loan portfolio. However, as of June 30, 2016, 64.58% of the Company’s loan portfolio was collateralized by real estate and is, therefore, susceptible to changes in local market conditions. While appropriate action is taken to manage identified concentration risks, management believes that the loan portfolio is well diversified by geographic location and among industry groups.

 

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Table of Contents

Purchased Credit Impaired Loans

The following table represents the contractually required principal balance of purchased credit impaired loans and the carrying balance at June 30, 2016 and December 31, 2015:

 

     June 30,      December 31,  
     2016      2015  

Contractually required principal payments for purchase credit impaired loans

   $ 9,671       $ 11,528   

Accretable yield

     (860      (1,070

Nonaccretable yield

     (145      (378
  

 

 

    

 

 

 

Balance of purchased credit impaired loans

   $ 8,666       $ 10,080   
  

 

 

    

 

 

 

The following tables summarize the changes in the accretable yield for purchased credit impaired loans for the periods ended June 30, 2016 and 2015:

 

     Three months ended  
     June 30, 2016     June 30, 2015  
     Century     Capital
Pacific
    Total     Century     Capital
Pacific
    Total  

Balance, beginning of period

   $ 11      $ 939      $ 950      $ 122      $ 1,490      $ 1,612   

Additions

     —          —          —          —          —          —     

Accretion to interest income

     (11     (79     (90     (26     (126     (152
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ —        $ 860      $ 860      $ 96      $ 1,364      $ 1,460   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six months ended  
     June 30, 2016     June 30, 2015  
     Century     Capital
Pacific
    Total     Century     Capital
Pacific
    Total  

Balance, beginning of period

   $ 39      $ 1,030      $ 1,069      $ 151      $ —        $ 151   

Additions

     —          —          —          —          1,569        1,569   

Accretion to interest income

     (39     (170     (209     (55     (205     (260
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ —        $ 860      $ 860      $ 96      $ 1,364      $ 1,460   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Allowance for Loan Losses

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 and 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. 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 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 U.S. 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.

The adequacy of the allowance for loan losses and the reserve for unfunded commitments is determined using a consistent, 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.

 

15


Table of Contents

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

 

     For the three months ended June 30, 2016  
     Commercial
and Other
    Real Estate      Construction     Consumer     Unallocated     Total  

Beginning balance

   $ 6,094      $ 8,753       $ 1,119      $ 43      $ 1,587      $ 17,596   

Charge-offs

     (665     —           —          (3     —          (668

Recoveries

     68        26         154        1        —          249   

Provision (reclassification)

     1,894        358         68        5        (375     1,950   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 7,391      $ 9,137       $ 1,341      $ 46      $ 1,212      $ 19,127   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     For the six months ended June 30, 2016  
     Commercial
and Other
    Real Estate      Construction     Consumer     Unallocated     Total  

Beginning balance

   $ 6,349      $ 8,297       $ 1,258      $ 46      $ 1,351      $ 17,301   

Charge-offs

     (665     —           —          (3     —          (668

Recoveries

     101        35         162        1        —          299   

Provision (reclassification)

     1,606        805         (79     2        (139     2,195   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 7,391      $ 9,137       $ 1,341      $ 46      $ 1,212      $ 19,127   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2016, the allowance for loan losses on dental loans was $4,151, compared to $4,022 at December 31, 2015. See Note 4 for additional information on the dental loan portfolio.

 

16


Table of Contents

The following table presents the allowance and recorded investment in loans by major loan classification at June 30, 2016 and December 31, 2015:

 

     Balances as of June 30, 2016  
     Commercial
and Other
     Real Estate      Construction      Consumer      Unallocated      Total  

Ending allowance: collectively evaluated for impairment

   $ 7,337       $ 9,128       $ 1,317       $ 46       $ 1,212       $ 19,040   

Ending allowance: individually evaluated for impairment

     54         9         24         —           —           87   

Ending allowance: loans acquired with deteriorated credit quality

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 7,391       $ 9,137       $ 1,341       $ 46       $ 1,212       $ 19,127   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending loan balance: collectively evaluated for impairment

   $ 518,797       $ 822,460       $ 123,948       $ 3,313       $ —         $ 1,468,518   

Ending loan balance: individually evaluated for impairment

     3,059         3,694         2,166         —           —           8,919   

Ending loan balance: loans acquired with deteriorated credit quality

     1,410         7,256         —           —           —           8,666   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 523,266       $ 833,410       $ 126,114       $ 3,313       $ —         $ 1,486,103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Balances as of December 31, 2015  
     Commercial
and Other
     Real Estate      Construction      Consumer      Unallocated      Total  

Ending allowance: collectively evaluated for impairment

   $ 6,303       $ 8,267       $ 1,159       $ 46       $ 1,351       $ 17,126   

Ending allowance: individually evaluated for impairment

     46         30         99         —           —           175   

Ending allowance: loans acquired with deteriorated credit quality

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 6,349       $ 8,297       $ 1,258       $ 46       $ 1,351       $ 17,301   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending loan balance: collectively evaluated for impairment

   $ 504,261       $ 771,543       $ 107,977       $ 3,351       $ —         $ 1,387,132   

Ending loan balance: individually evaluated for impairment

     2,627         5,782         391         —           —           8,800   

Ending loan balance: loans acquired with deteriorated credit quality

     1,668         8,412         —           —           —           10,080   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 508,556       $ 785,737       $ 108,368       $ 3,351       $ —         $ 1,406,012   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The June 30, 2016, ending allowance includes $87 in specific allowance for $8,919 of impaired loans ($7,700 net of government guarantees). At December 31, 2015, the Company had $8,800 of impaired loans ($7,527 net of government guarantees) with a specific allowance of $175 assigned.

Management believes that the allowance for loan losses was adequate as of June 30, 2016. 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.

 

17


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 range 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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Table of Contents

The following tables present the Company’s loan portfolio information by loan type and credit grade at June 30, 2016 and December 31, 2015:

Credit Quality Indicators

As of June 30, 2016

 

     Loan Grade        
     Pass     Special Mention     Substandard     Doubtful     Totals  

Real estate loans

          

Multi-family residential

   $ 66,403      $ —        $ —        $ —        $ 66,403   

Residential 1-4 family

     47,959        —          3,693        —          51,652   

Owner-occupied commercial

     367,064        —          8,847        —          375,911   

Nonowner-occupied commercial

     335,448        —          3,996        —          339,444   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     816,874        —          16,536        —          833,410   

Construction

          

Multi-family residential

     16,743        —          —          —          16,743   

Residential 1-4 family

     34,372        —          —          —          34,372   

Commercial real estate

     57,690        —          100        —          57,790   

Commercial bare land and acquisition & development

     10,551        —          —          —          10,551   

Residential bare land and acquisition & development

     4,420        —          2,238        —          6,658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction loans

     123,776        —          2,338        —          126,114   

Commercial and other

     509,305        —          13,961        —          523,266   

Consumer

     3,313        —          —          —          3,313   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

   $ 1,453,268      $ —        $ 32,835      $ —        $ 1,486,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of portfolio

     97.79     0.00     2.21     0.00     100.00

Credit Quality Indicators

As of December 31, 2015

 

     Loan Grade        
     Pass     Special Mention     Substandard     Doubtful     Totals  

Real estate loans

          

Multi-family residential

   $ 66,208      $ —        $ 237      $ —        $ 66,445   

Residential 1-4 family

     49,077        —          4,699        —          53,776   

Owner-occupied commercial

     353,249        —          11,493        —          364,742   

Nonowner-occupied commercial

     296,528        —          4,246        —          300,774   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     765,062        —          20,675        —          785,737   

Construction

          

Multi-family residential

     7,027        —          —          —          7,027   

Residential 1-4 family

     30,803        —          53        —          30,856   

Commercial real estate

     42,580        —          100        —          42,680   

Commercial bare land and acquisition & development

     20,265        —          272        —          20,537   

Residential bare land and acquisition & development

     4,969        —          2,299        —          7,268   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction loans

     105,644        —          2,724        —          108,368   

Commercial and other

     494,267        —          14,289        —          508,556   

Consumer

     3,350        —          1        —          3,351   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

   $ 1,368,323      $ —        $ 37,689      $ —        $ 1,406,012   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of portfolio

     97.32     0.00     2.68     0.00     100.00

At June 30, 2016 and December 31, 2015, the Company had $322, and $360, respectively, in unfunded commitments on its classified loans, which is included in the calculation of our classified asset ratio.

 

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Table of Contents

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, 2016 and December 31, 2015:

Age Analysis of Loans Receivable

As of June 30, 2016

 

     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

   $ —        $ —        $ —        $ —        $ —        $ 66,403      $ 66,403   

Residential 1-4 family

     —          —          —          408        408        51,244        51,652   

Owner-occupied commercial

     —          —          —          1,662        1,662        374,249        375,911   

Nonowner-occupied commercial

     —          —          —          727        727        338,717        339,444   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     —          —          —          2,797        2,797        830,613        833,410   

Construction

              

Multi-family residential

     —          —          —          —          —          16,743        16,743   

Residential 1-4 family

     —          —          —          —          —          34,372        34,372   

Commercial real estate

     —          —          —          —          —          57,790        57,790   

Commercial bare land and acquisition & development

     —          —          —          —          —          10,551        10,551   

Residential bare land and acquisition & development

     —          —          —          —          —          6,658        6,658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction loans

     —          —          —          —          —          126,114        126,114   

Commercial and other

     274        —          —          1,501        1,775        521,491        523,266   

Consumer

     —          —          —          —          —          3,313        3,313   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 274      $ —        $ —        $ 4,298      $ 4,572      $ 1,481,531      $ 1,486,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of portfolio

     0.02     0.00     0.00     0.29     0.31     99.69     100.00

Age Analysis of Loans Receivable

As of December 31, 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

   $ —        $ —        $ —        $ —        $ —        $ 66,445      $ 66,445   

Residential 1-4 family

     —          —          —          733        733        53,043        53,776   

Owner-occupied commercial

     —          —          —          2,369        2,369        362,373        364,742   

Nonowner-occupied commercial

     —          —          —          790        790        299,984        300,774   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     —          —          —          3,892        3,892        781,845        785,737   

Construction

              

Multi-family residential

     —          —          —          —          —          7,027        7,027   

Residential 1-4 family

     480        —          —          53        533        30,323        30,856   

Commercial real estate

     —          —          —          —          —          42,680        42,680   

Commercial bare land and acquisition & development

     —          —          —          —          —          20,537        20,537   

Residential bare land and acquisition & development

     —          —          —          —          —          7,268        7,268   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction loans

     480        —          —          53        533        107,835        108,368   

Commercial and other

     —          —          —          1,564        1,564        506,992        508,556   

Consumer

     1        3        —          —          4        3,347        3,351   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 481      $ 3      $ —        $ 5,509      $ 5,993      $ 1,400,019      $ 1,406,012   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of portfolio

     0.03     0.00     0.00     0.39     0.43     99.57     100.00

 

20


Table of Contents

Impaired Loans

Regular credit reviews of the portfolio are performed to identify loans that are considered potentially impaired. Potentially impaired loans are referred to the Asset-Liability Committee “ALCO” for review and are included in the specific calculation of allowance for loan losses. 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.

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.

 

21


Table of Contents

The following tables display an analysis of the Company’s impaired loans at June 30, 2016, and December 31, 2015:

Impaired Loan Analysis

As of June 30, 2016

 

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

Real estate

                 

Multi-family residential

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

Residential 1-4 family

     166         304         470         491         575         5   

Owner-occupied commercial

     988         —           988         988         1,299         —     

Nonowner-occupied commercial

     2,232         4         2,236         2,297         2,272         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     3,386         308         3,694         3,776         4,146         9   

Construction

                 

Multi-family residential

     —           —           —           —           —           —     

Residential 1-4 family

     —           —           —           —           75         —     

Commercial real estate

     —           —           —           —           —           —     

Commercial bare land and acquisition & development

     —           —           —           —           —           —     

Residential bare land and acquisition & development

     1,838         328         2,166         2,166         1,564         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     1,838         328         2,166         2,166         1,639         24   

Commercial and other

     1,993         1,066         3,059         3,450         3,105         54   

Consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 7,217       $ 1,702       $ 8,919       $ 9,392       $ 8,890       $ 87   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loan Analysis

As of December 31, 2015

 

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

Real estate

                 

Multi-family residential

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

Residential 1-4 family

     374         308         682         911         766         5   

Owner-occupied commercial

     2,788         —           2,788         2,788         1,177         —     

Nonowner-occupied commercial

     2,287         25         2,312         2,374         2,395         25   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     5,449         333         5,782         6,073         4,338         30   

Construction

                 

Multi-family residential

     —           —           —           —           —           —     

Residential 1-4 family

     53         —           53         72         32         —     

Commercial real estate

     —           —           —           —           —           —     

Commercial bare land and acquisition & development

     —           —           —           —           —           —     

Residential bare land and acquisition & development

     —           338         338         338         347         99   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     53         338         391         410         379         99   

Commercial and other

     2,091         536         2,627         3,018         2,404         46   

Consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 7,593       $ 1,207       $ 8,800       $ 9,501       $ 7,121       $ 175   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The impaired balances reported above are not adjusted for government guarantees of $1,219, and $1,273 at June 30, 2016 and December 31, 2015, respectively. The recorded investment in impaired loans, net of government guarantees, totaled $7,700, and $7,527 at June 30, 2016, and December 31, 2015, 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, 2016 and December 31, 2015:

 

     Troubled Debt Restructurings as of  
     June 30, 2016      December 31, 2015  
     Number of
Contracts
     Post-Modification
Outstanding Recorded
Investment
     Number of
Contracts
     Post-Modification
Outstanding Recorded
Investment
 

Real estate

           

Multifamily residential

     —         $ —           —         $ —     

Residential 1-4 family

     3         470         6         682   

Owner-occupied commercial

     3         1,432         3         2,788   

Non owner-occupied commercial

     7         2,235         7         2,312   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     13         4,137         16         5,782   

Construction

           

Multifamily residential

     —           —           —           —     

Residential 1-4 family

     —           —           —           —     

Commercial real estate

     —           —           —           —     

Commercial bare land and acquisition & development

     —           —           —           —     

Residential bare land and acquisition & development

     2         1,838         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     2         1,838         —           —     

Commercial and other

     16         3,169         11         2,170   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     31       $ 9,144         27       $ 7,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

The recorded investment in TDRs on nonaccrual status totaled $2,507, and $1,807 at June 30, 2016 and December 31, 2015, 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 a minimum of six months of payment performance as sufficient to warrant a return to accrual status.

For the six months ended June 30, 2016, the Company restructured $3,370 loans into TDRs 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

Below is a table of the newly restructured loans identified in the six months ended June 30, 2016.

 

     Troubled Debt Restructurings Identified During  
     the Six Months ended June 30, 2016  
     Rate
Modification
     Term
Modification
     Interest-only
Modification
     Combination
Modification
 

Real estate

           

Multi-family residential

   $ —         $ —         $ —         $ —     

Residential 1-4 family

     —           —           —           —     

Owner-occupied commercial

     —           —           444         —     

Nonowner-occupied commercial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     —           —           444         —     

Construction

           

Multi-family residential

     —           —           —           —     

Residential 1-4 family

     —           —           —           —     

Commercial real estate

     —           —           —           —     

Commercial bare land and acquisition & development

     —           —           —           —     

Residential bare land and acquisition & development

     —           —           —           1,838   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —           —           —           1,838   

Commercial and other

     —           —           397         691   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 841       $ 2,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no newly restructured loans identified in the six months ended June 30, 2015.

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. The following table represents loans receivable modified as TDRs that subsequently defaulted within the first twelve months of restructure during the period;

 

     Troubled Debt Restructurings  
     that Subsequently Defaulted During  
     the six Months ended June 30,  
     2016      2015  
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 

Real estate

           

Multi-family residential

     —         $ —           —         $ —     

Residential 1-4 family

     —           —           —           —     

Owner-occupied commercial

     1         443         —           —     

Nonowner-occupied commercial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1         443         —           —     

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

     —           —           —           —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 443         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2016 and December 31, 2015, the Company had no commitments to lend additional funds on loans restructured as TDRs.

 

24


Table of Contents

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, 2016 and December 31, 2015, loans to dental professionals totaled $369,810, and $340,162, respectively, and represented 24.88%, and 24.19% in principal amount of total outstanding loans, respectively. As of June 30, 2016 and December 31, 2015, dental loans were supported by government guarantees totaling $7,327 and $9,027, respectively. These guarantees represented 1.98%, and 2.65% 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.

Loan Classification

Major classifications of dental loans at June 30, 2016 and December 31, 2015, were as follows:

 

     June 30,
2016
     December 31,
2015
 

Real estate secured loans:

     

Owner-occupied commercial

   $ 60,253       $ 56,145   

Other dental real estate loans

     2,242         2,198   
  

 

 

    

 

 

 

Total permanent real estate loans

     62,495         58,343   

Dental construction loans

     4,813         4,334   
  

 

 

    

 

 

 

Total real estate loans

     67,308         62,677   

Commercial loans

     302,502         277,485   
  

 

 

    

 

 

 

Gross loans

   $ 369,810       $ 340,162   
  

 

 

    

 

 

 

Market Area

The Bank’s principal “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, Portland and Seattle. The Company also makes national dental loans throughout the United States, and currently has dental loans in 42 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,
2016
     December 31,
2015
 

Local

   $ 152,109       $ 145,817   

National

     217,701         194,345   
  

 

 

    

 

 

 

Total

   $ 369,810       $ 340,162   
  

 

 

    

 

 

 

 

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Table of Contents

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 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, out-of-market 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,
 
     2016      2015      2016      2015  

Balance, beginning of period

   $ 3,884       $ 3,912       $ 4,022       $ 4,141   

Reclassification

     253         198         103         3   

Charge-offs

     —           (42      —           (84

Recoveries

     14         12         26         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 4,151       $ 4,080       $ 4,151       $ 4,080   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2016 and December 31, 2015:

As of June 30, 2016

 

     Loan Grade         
     Pass      Special Mention      Substandard      Doubtful      Totals  

Local

   $ 149,978       $ —         $ 2,131       $ —         $ 152,109   

National

     214,439         —           3,262         —           217,701   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 364,417       $ —         $ 5,393       $ —         $ 369,810   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
As of December 31, 2015   
     Loan Grade         
     Pass      Special Mention      Substandard      Doubtful      Totals  

Local

   $ 143,541       $ —         $ 2,276       $ —         $ 145,817   

National

     191,574         —           2,771         —           194,345   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 335,115       $ —         $ 5,047       $ —         $ 340,162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Past Due and Nonaccrual Loans

Please refer to Note 3 for additional information on the definitions of “past due.”

The following tables present an aged analysis of the dental loan portfolio by market, including nonaccrual loans, as of June 30, 2016 and December 31, 2015:

As of June 30, 2016

 

     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

   $ 24       $ —         $ —         $ 482       $ 506       $ 151,603       $ 152,109   

National

     —           —           —           —           —           217,701         217,701   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24       $ —         $ —         $ 482       $ 506       $ 369,304       $ 369,810   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 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

   $ —         $ —         $ —         $ 513       $ 513       $ 145,304       $ 145,817   

National

     —           —           —           —           —           194,345         194,345   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ —         $ 513       $ 513       $ 339,649       $ 340,162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTE 5 – FEDERAL FUNDS AND OVERNIGHT FUNDS PURCHASED

The Company had unsecured federal funds borrowing lines with various correspondent banks totaling $129,000 at both June 30, 2016 and December 31, 2015. The terms of the lines are subject to change with interest payable at the then stated rate. At June 30, 2016 and December 31, 2015, there were no borrowings outstanding on these lines.

The Company also had a secured overnight borrowing line available from the Federal Reserve Bank that totaled $74,660 and $76,912 at June 30, 2016 and December 31, 2015, respectively. The Federal Reserve Bank borrowing line is secured through the pledging of $140,237 and $140,801 at June 30, 2016 and December 31, 2015, respectively, of commercial loans under the Company’s Borrower-In-Custody program. At June 30, 2016 and December 31, 2015, there were no outstanding borrowings on this line. The terms of the lines are subject to change with interest payable at the then stated rate.

In addition to federal funds borrowing lines, the Company maintains a letter of credit valued at $1,200 with a correspondent bank. The purpose of this line is to support commitments of the Company’s clients when conducting business internationally. At June 30, 2016 and December 31, 2015, 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 and stock holdings.

At June 30, 2016, the maximum borrowing line was $708,894; however, the FHLB borrowing line was limited by the discounted value of collateral pledged. At June 30, 2016, the Company had pledged $696,662 in real estate loans to the FHLB that had a discounted collateral value of $471,505. There was $151,500 borrowed on this line at June 30, 2016.

At December 31, 2015, the maximum borrowing line was $657,086; however, the FHLB borrowing line was limited by the discounted value of collateral pledged. At December 31, 2015, the Company had pledged $666,297 in real estate loans to the FHLB that had a discounted collateral value of $414,044. There was $77,500 borrowed on this line at December 31, 2015.

Below is a summary of outstanding FHLB borrowings by maturity.

 

     Current
Rates
    June 30,
2016
 

Cash management advance

     NA      $ 121,000   

2016

     1.84%-2.36%        22,500   

2017

     2.28     3,000   

2018

     1.55     3,000   

2019

     —          —     

2020

     —          —     

Thereafter

     3.85     2,000   
    

 

 

 
     $ 151,500   
    

 

 

 

NOTE 7 – BORROWED FUNDS

Subordinated Debentures

In June 2016, in a regional public offering the Company issued $35,000 in aggregate principal amount of fixed-to-floating rate subordinated debentures (the “Notes”). The Notes are callable at par after five years, have a stated maturity of June 30, 2026 and bear interest at a fixed annual rate of 5.875% per year, from and including June 27, 2016 but excluding June 30, 2021. From and including June 30, 2021 to the maturity date or early redemption date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR plus 471.5 basis points.

 

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Table of Contents

The Notes are included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

Junior Subordinated Debentures

In November 2005, the Company completed the private placement of $8,248 in aggregate liquidation amount of trust preferred securities (the “TPS”), through its subsidiary, Pacific Continental Capital Trust I. The interest rate on the TPS was 6.265% until January 2011, after which it was converted to a floating rate of three-month LIBOR plus 135 basis points. The TPS mature in 30 years, but are callable by the Company at par any time after January 7, 2011.

The Company issued $8,000 of junior subordinated debentures (the “Debentures”) to the trust in exchange for ownership of all of the common security of the trust and the proceeds of the preferred securities sold by the trust. In accordance with current accounting guidance, the trust is not consolidated in the Company’s financial statements, but rather the Debentures are shown as a liability. The interest rate on the Debentures was 6.265% until January 2011, after which it was converted to a floating rate of three-month LIBOR plus 135 basis points. The Debentures have the same prepayment provisions as the TPS.

The Debentures are included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

NOTE 8 – 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 stock-based awards. The awards granted under this plan are service-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 100.00% 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 Corporation and its subsidiary. 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.

The following table summarizes the shares and the aggregate grant-date fair value of the equity- based awarded granted:

 

    

Six months ended

June 30,

 
     2016      2015  
     Shares      Grant Date
Fair Market
Value
     Shares      Grant Date
Fair Market
Value
 

Equity-based awards:

           

Director restricted stock—no restrictions

     14,400       $ 240         19,185       $ 248   

Employee RSUs—4 year vesting

     130,151         2,161         148,460         1,921   

Employee RSUs—vest immediately

     300         5         386         5   

Employee RSUs—Cliff vest January 1, 2019

     —           —           7,052         100   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 144,851       $ 2,406       $ 175,083       $ 2,274   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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, 2016, and 2015:

 

    

Three months ended

June 30,

 
     2016      2015  
     Compensation
Expense
     Tax Benefit      Compensation
Expense/
(Income)
     Tax Benefit  

Equity-based awards:

           

Director restricted stock

   $ 240       $ 91       $ 248       $ 94   

Employee RSUs

     406         154         376         143   

Liability-based awards:

           

Employee cash SARs

     —           —           (50      (19
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 646       $ 245       $ 574       $ 218   
  

 

 

    

 

 

    

 

 

    

 

 

 
    

Six months ended

June 30,

 
     2016      2015  
     Compensation
Expense
     Tax Benefit
(Expense)
     Compensation
Expense/
(Income)
     Tax Benefit  

Equity-based awards:

           

Director restricted stock

   $ 240       $ 91       $ 248       $ 94   

Employee RSUs

     790         300         708         269   

Liability-based awards:

           

Employee cash SARs

     —           —           (50      (19
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,030       $ 391       $ 906       $ 344   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2016:

 

     Six months ended
June 30, 2016
 
     Non-Vested
Restricted Stock
Units
     Weighted Average
Grant Date Fair
Value
 

Balance, beginning of period

   $ 330,997       $ 12.23   

Granted

     130,151         16.66   

Vested shares issued

     (80,051      11.46   

Vested shares surrendered for taxes

     (48,173      11.46   

Forfeited or expired

     (20,567      9.96   
  

 

 

    

Balance, end of period

   $ 312,357         14.31   
  

 

 

    

 

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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, 2016 and 2015:

 

     Three months ended  
     June 30, 2016  
     Number
Exercised
     Weighted
Average
Exercise
Price
     Intrinsic
Value
     Number
of
Shares
Issued
     Net Cash
Payment
to
Employees
 

Stock options

     11,951       $ 12.07       $ 54         11,951         NA   

Employee stock SARs

     32,304       $ 13.41       $ 16         3,871         NA   

Employee cash SARs

     16,301       $ 14.07         NA         NA       $ 27   
  

 

 

       

 

 

    

 

 

    

 

 

 
     60,556          $ 70         15,822       $ 27   
  

 

 

       

 

 

    

 

 

    

 

 

 
     Six months ended  
     June 30, 2016  
     Number
Exercised
     Weighted
Average
Exercise
Price
     Intrinsic
Value
     Number
of
Shares
Issued
     Net Cash
Payment
to
Employees
 

Stock options

     28,426       $ —         $ 108         28,426         NA   

Employee stock SARs

     38,569       $ 11.82       $ 20         4,866         NA   

Employee cash SARs

     20,123       $ 11.69         NA         NA       $ 32   
  

 

 

       

 

 

    

 

 

    

 

 

 
     87,118          $ 128         33,292       $ 32   
  

 

 

       

 

 

    

 

 

    

 

 

 
     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       $ —     
  

 

 

       

 

 

    

 

 

    

 

 

 
     600            1         52         —     
  

 

 

       

 

 

    

 

 

    

 

 

 
     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       $ —     
  

 

 

       

 

 

    

 

 

    

 

 

 
     2,523            3         1,194         —     
  

 

 

       

 

 

    

 

 

    

 

 

 

At June 30, 2016, the Company had estimated unrecognized compensation expense of approximately $3,341 for unvested RSUs. This amount is based on a historical forfeiture rate 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 2.89 years as of June 30, 2016.

 

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Table of Contents

NOTE 9 – DERIVATIVE INSTRUMENTS

The Bank purchases derivative instruments as a way to help mitigate interest rate risk. During the first quarter 2013, the Company entered into an interest rate swap agreement with an $8,000 notional amount to convert its variable-rate Junior Subordinated Debenture debt into a fixed rate for a term of seven years at a rate of 2.73%. The derivative is designated as a cash flow hedge. The cash flow hedge meets the definition of highly effective and the Company expects the hedge to be highly effective throughout the remaining term of the swap. The fair value of the derivative instrument at June 30, 2016, was a $100 unrealized loss, which is recorded in accrued interest and other payables on the consolidated balance sheet. The Company pledged $400 under collateral arrangements to satisfy collateral requirements associated with the interest rate swap contract.

The Bank maintains two interest rate swaps with commercial banking customers tied to loans on the consolidated balance sheet. Those interest rate swaps are simultaneously hedged by offsetting the interest rate swaps that the Bank executes with a third party, such that the Bank minimizes its net risk exposure. As of June 30, 2016 and December 31, 2015, the Bank had non-hedge designated interest rate swaps with an aggregate notional amount of approximately $8,659 and $8,774, respectively, related to this program. The Bank does not require separately pledged collateral to secure its interest rate swaps with customers. However, it does make a practice of cross-collateralizing the interest rate swaps with collateral on the underlying loan. The Bank has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral totaling $250 consisting of cash held on deposit for the benefit of the counterparty against its obligations under these agreements as of June 30, 2016 and December 31, 2015.

The Bank entered into a swap with a third party to serve as a hedge to an equal amount of fixed rate loans. As of June 30, 2016 and December 31, 2015, the Bank had one swap designated a hedging instrument with a notional amount of $1,508 hedging a 10-year fixed rate note bearing interest at 5.71% and maturing August 2023. The notional amount does not represent direct credit exposure. Direct credit exposure is limited to the net difference between the calculated amount to be received and paid. As the Bank has designated the swap a fair value hedge, the underlying hedged loan is carried at fair value on the consolidated balance sheet and included in loans, net of deferred fees.

During second quarter 2016, the Bank entered into forward-starting interest rate swaps, to convert certain existing and future short-term borrowings to fixed rate payments. The primary purpose of these hedges is to mitigate the risk of rising interest rates, specifically LIBOR rates, which are a benchmark for the short term borrowings. The hedging program qualifies as a cash flow hedge under FASB ASC 815, which provides for matching of the recognition of gains and losses of the interest rate swaps and the hedged items. The hedged item is the LIBOR portion of the series of existing or future short-term fixed rate borrowings over the term of the interest rate swap. The change in the fair value of the interest rate swaps is recorded in other comprehensive income. The Bank had notional amounts of $25,000 subject to interest rate swaps to hedge anticipated future borrowings as of June 30, 2016. The unrealized loss, gross of the related tax benefit, on these interest rate swaps as of June 30, 2016 was $535. The Company pledged cash totaling $1,100 under collateral arrangements to satisfy collateral requirements associated with the interest rate swap contract.

The following tables present quantitative information pertaining to the commercial loan related interest rate swaps as of June 30, 2016 and December 31, 2015:

 

     June 30, 2016     December 31, 2015  
     Hedge-
Designated
    Not-Hedge-
Designated
    Hedge-
Designated
    Not-Hedge-
Designated
 

Notional amount

   $ 1,508      $ 8,659      $ 1,525      $ 8,774   

Weighted average pay rate

     5.71     4.85     5.71     4.85

Weighted average receive rate

     3.44     3.53     3.20     3.28

Weighted average maturity in years

     7.1        6.0        7.6        6.5   

 

32


Table of Contents

The following table presents the fair values of derivative instruments and their locations in the consolidated balance sheets as of June 30, 2016 and December 31, 2015:

 

          Asset Derivatives      Liability Derivatives  

Derivative

  

Balance sheet
location

   June 30,
2016
     December 31,
2015
     June 30,
2016
     December 31,
2015
 

Cash flow hedge—trust preferred

   Other assets or other payables    $ —         $ 82       $ 144       $ —     

Cash flow hedge—long term borrowing

   Other assets or other payables      —           —           877         —     

Interest rate swap designated as hedging instrument

   Other assets or other payables      130         66         162         93   

Interest rate swap not designated as hedging instrument

   Other assets or other payables      199         24         200         24   
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 329       $ 172       $ 1,383       $ 117   
     

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the income statement impact of the derivative instruments for the three and six months ended June 30, 2016 and 2015:

 

          Three months ended      Six months ended  

Derivative

  

Income statement

location

   June 30,      June 30,  
      2016     2015      2016     2015  

Interest rate swap designated as hedging instrument

   Other noninterest income    $ (3   $ 5       $ (4   $ 1   
     

 

 

   

 

 

    

 

 

   

 

 

 
      $ (3   $ 5       $ (4   $ 1   
     

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

NOTE 10 - FAIR VALUE

The following disclosures about fair value of financial instruments are made in accordance with provisions of ASC 825 “Financial Instruments.” The use of different assumptions and estimation methods could have a significant effect on 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.

The estimated fair values of the financial instruments at June 30, 2016 and December 31, 2015:

 

     June 30, 2016      December 31, 2015  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

           

Cash and cash equivalents

   $ 43,389       $ 43,389       $ 36,675       $ 36,675   

Securities available-for-sale

     396,230         396,230         366,598         366,598   

Loans, net of deferred fees

     1,484,152         1,470,495         1,404,482         1,389,562   

Interest receivable

     6,334         6,334         5,721         5,721   

Federal Home Loan Bank stock

     8,351         8,351         5,208         5,208   

Bank-owned life insurance

     23,174         23,174         22,884         22,884   

Interest rate swaps

     329         329         172         172   

Financial liabilities:

           

Deposits

   $ 1,600,132       $ 1,600,418       $ 1,597,093       $ 1,597,280   

Federal Home Loan Bank borrowings

     151,500         151,817         77,500         77,651   

Subordinated debenture

     34,092         35,000         —           —     

Junior subordinated debentures

     8,248         2,787         8,248         2,741   

Interest payable

     145         145         138         138   

Interest rate swaps

     1,383         1,383         117         117   

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.

Interest rate swaps – Fair value is based on quoted market prices.

 

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Table of Contents

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

Subordinated debentures – Fair value of subordinated debentures is estimated by discounting future cash flows at rates currently available for debt with similar credit risk, 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.

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.

 

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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, 2016 and December 31, 2015:

 

     Carrying
Amount
     Fair Value at June 30, 2016  
      Level 1      Level 2      Level 3  

Financial assets:

           

Cash and cash equivalents

   $ 43,389       $ 43,389       $ —         $ —     

Loans, net of deferred fees

     1,484,152         —           —           1,470,495   

Interest receivable

     6,334         6,334         —           —     

Federal Home Loan Bank stock

     8,351         8,351         —           —     

Bank-owned life insurance

     23,174         23,174         —           —     

Interest rate swaps

     329         329         —           —     

Financial liabilities:

           

Deposits

   $ 1,600,132       $ 1,451,001       $ 149,417       $ —     

Federal Home Loan Bank borrowings

     151,500         —           151,817         —     

Subordinated debentures

     34,092         —           35,000         —     

Junior subordinated debentures

     8,248         —           2,787         —     

Interest payable

     145         145         —           —     

Interest rate swaps

     1,383         1,383         —           —     
     Carrying
Amount
     Fair Value at December 31, 2015  
      Level 1      Level 2      Level 3  

Financial assets:

           

Cash and cash equivalents

   $ 36,675       $ 36,675       $ —         $ —     

Loans

     1,404,482         —           —           1,389,562   

Interest receivable

     5,721         5,721         —           —     

Federal Home Loan Bank stock

     5,208         5,208         —           —     

Bank-owned life insurance

     22,884         22,884         —           —     

Interest rate swaps

     172         172         —           —     

Financial liabilities:

           

Deposits

   $ 1,597,093       $ 1,458,490       $ 138,790       $ —     

Federal Home Loan Bank borrowings

     77,500         —           77,651         —     

Junior subordinated debentures

     8,248         —           2,741         —     

Accrued interest payable

     138         138         —           —     

Interest rate swaps

     117         117         —           —     

 

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The tables below show assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015:

 

     Carrying
Value
     Fair Value at June 30, 2016  
      Level 1      Level 2      Level 3  

Financial Assets

           

Available-for-sale securities

           

Obligations of U.S. government agencies

   $ 26,653       $ —         $ 26,653       $ —     

Obligations of states and political subdivisions

     100,077         —           100,077         —     

Agency mortgage-backed securities

     228,150         —           228,150         —     

Private-label mortgage-backed securities

     2,246         —           847         1,399   

SBA pools

     38,216         —           38,216         —     

Corporate securities

     888         —           888         —     

Interest rate swaps

     329         329         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured on a recurring basis

   $ 396,559       $ 329       $ 394,831       $ 1,399   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap liabilities measured on a recurring basis

   $ 1,383       $ 1,383       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Carrying
Value
     Fair Value at December 31, 2015  
      Level 1      Level 2      Level 3  

Available-for-sale securities

           

Obligations of U.S. government agencies

   $ 44,623       $ —         $ 44,623       $ —     

Obligations of states and political subdivisions

     97,151         —           97,151         —     

Agency mortgage-backed securities

     185,370         —           185,370         —     

Private-label mortgage-backed securities

     2,789         —           1,203         1,586   

SBA pools

     35,772         —           35,772         —     

Corporate securities

     893         —           893         —     

Interest rate swaps

     172         172         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured on a recurring basis

   $ 366,770       $ 172       $ 365,012       $ 1,586   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap liabilities measured on a recurring basis

   $ 117       $ 117       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

No transfers to or from Levels 1 and 2 occurred on assets and liabilities measured at fair value on a recurring basis during the six months ended June 30, 2016, or during the year ended December 31, 2015.

 

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The following is a description of the inputs and valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis. Fair value for all classes of available-for-sale securities and derivative instruments are 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. 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, 2016 and 2015:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2016      2015      2016      2015  

Beginning balance

   $ 1,520       $ 1,545       $ 1,586       $ 1,568   

Transfers into level 3

     —           300         —           300   

Transfers out of Level 3

     —           —           —           —     

Total gains or losses

           

Included in earnings

     —           (13      (17      (13

Included in other comprehensive income

     (31      29         (18      68   

Paydowns

     (90      (78      (152      (140

Purchases, issuances, sales and settlements

           

Purchases

     —           —           —           —     

Issuances

     —           —           —           —     

Sales

     —           —           —           —     

Settlements

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 1,399       $ 1,783       $ 1,399       $ 1,783   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 quoted prices for similar instruments or model-derived valuations whose inputs are observable or whose significant value drivers are observable. In instances where quoted prices for identical or similar instruments and observable inputs are not available, unobservable inputs, including the Company’s own data, are used.

The Company utilizes FTN Financial as an independent third-party asset 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.

 

    Corporate securities – TRACE reported trades.

 

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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.

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 yields, applied base spread, yield to worst or market convention, ratings updates, prepayment schedules (housing bonds), material event notice adjustments, and evaluations based on T+3 settlement.

 

    Private-label mortgage-backed securities – security characteristics, prepayment speeds, cash flows, TBA, Treasury and swap curves, IO/PO strips or floating indexes, applied base spread, spread adjustments, yield to worst or market convention, ratings updates (whole-loan collateral), and evaluations based on T+0 settlement.

 

    Mortgage-backed securities – security characteristics, TBA, Treasury, or floating index benchmarks, spread to TBA levels, prepayment speeds, applied spreads, and evaluations based on T+0 settlement.

 

    SBA pools – security characteristics, TBA, Treasury, or floating index benchmarks, spread to TBA levels, prepayment speeds, applied spreads, and evaluations based on T+0 settlement.

 

    Corporate securities – security characteristics, defined sector break-down, benchmark yields, applied based spread, yield to maturity (bullet structures), corporate action adjustment, and evaluations based on T+3 settlement.

The third-party pricing service follows multiple review processes to assess the available market, credit and deal-level information to support its valuation estimates. If sufficient objectively verifiable information is not available to support a security’s valuation, an alternate independent evaluation source will be used.

The Company’s securities portfolio was valued through its independent third-party pricing service using evaluated pricing models and quoted prices based on market data. For further assurance, the Company’s estimate of fair value was compared to an additional independent third-party estimate at June 30, 2016, and the Company obtained key inputs for a sample of securities across sectors and evaluated those inputs for reasonableness. This analysis was performed at the individual security level and no material variances were noted.

There have been no significant changes in the valuation techniques during the periods reported.

 

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The tables below show assets measured at fair value on a nonrecurring basis as of June 30, 2016 and December 31, 2015:

 

June 30, 2016    Carrying
Value
     Fair Value  
      Level 1      Level 2      Level 3  

Loans measured for impairment (net of government guarantees and specific reserves)

   $ —         $ —         $ —         $ —     

Other real estate owned

     132         —           —           132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 132       $ —         $ —         $ 132   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

   Carrying
Value
     Fair Value  
      Level 1      Level 2      Level 3  

Loans measured for impairment (net of government guarantees and specific reserves)

   $ 53       $ —         $ —         $ 53   

Other real estate owned

     10,147         —           —           10,147   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,200       $ —         $ —         $ 10,200   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a nonrecurring basis.

Loans measured for impairment (net of government guarantees and specific reserves) include the estimated fair value of collateral-dependent loans, less collectible government guarantees, as well as certain noncollateral-dependent loans measured for impairment with an allocated specific reserve. When a collateral-dependent loan is identified as impaired, the value of the loan is measured using the current fair value of the collateral less selling costs. The fair value of collateral is generally estimated by obtaining external appraisals which are usually updated every 6 to 12 months based on the nature of the impaired loans. Certain noncollateral-dependent loans measured for impairment with an allocated specific reserve are valued based upon the estimated net realizable value of the loan. If the estimated fair value of the impaired loan, less collectible government guarantees, is less than the recorded investment in the loan, impairment is recognized as a charge-off through the allowance for loan losses. The carrying value of the loan is adjusted to the estimated fair value. The carrying value of loans fully charged off is zero.

Other real estate owned represents real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property’s new basis. Any write downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically orders appraisals or performs valuations to ensure that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Appraisals are generally updated every 6 to 12 months on other real estate owned. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on other real estate owned for fair value adjustments based on the fair value of the real estate.

There have been no significant changes in the valuation techniques during the periods reported.

 

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NOTE 11 – REGULATORY MATTERS

The Company and the Bank are subject to the regulations of certain federal and state agencies and receive periodic examinations by those regulatory authorities. In addition, they are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total capital, Tier 1 capital, common equity Tier 1 to risk-weighted assets and, Tier 1 capital to leverage assets. Management believes that, as of June 30, 2016, the Company and the Bank met all capital adequacy requirements to which they were subject.

 

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As of June 30, 2016, and according to Federal Reserve and FDIC guidelines, the Bank was considered to be well-capitalized. To be categorized as well-capitalized, the Bank must maintain minimum Total capital, Tier 1 capital, common equity Tier 1 to risk-weighted assets and, Tier 1 capital to leverage assets ratios as set forth in the following table.

 

     Actual     For Capital
Adequacy Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of June 30, 2016:

               

Total capital (to risk weighted assets)

               

Bank: