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Table of Contents

UNITED STATES

SECURITIES & EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2017.

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  ☒    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  ☒    No  ☐

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

 

Large accelerated filer      Accelerated filer     Non-accelerated filer  
Smaller Reporting company      Emerging growth company      

If an emerging growth company, indicate by check mark if the registrant has selected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act  ☐

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

The number of shares of common stock outstanding as of October 31, 2017 was 22,772,483.


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      65  
ITEM 4    Controls and Procedures      65  
PART  II    OTHER INFORMATION      66  
ITEM 1    Legal Proceedings      66  
ITEM 1A    Risk Factors      66  
ITEM 2    Unregistered Sales of Equity Securities and Use of Proceeds      67  
ITEM 3    Defaults upon Senior Securities      67  
ITEM 4    Mine Safety Disclosures      67  
ITEM 5    Other Information      67  
ITEM 6    Exhibits      67  

 

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)

 

     September 30,
2017
    December 31,
2016
 

ASSETS

    

Cash and due from banks

   $ 27,748     $ 30,154  

Interest-bearing deposits with banks

     42,530       36,959  
  

 

 

   

 

 

 

Total cash and cash equivalents

     70,278       67,113  

Securities available-for-sale

     453,660       470,996  

Loans, net of deferred fees

     1,882,842       1,857,767  

Allowance for loan losses

     (23,363     (22,454
  

 

 

   

 

 

 

Net loans

     1,859,479       1,835,313  

Interest receivable

     6,502       7,107  

Federal Home Loan Bank stock

     7,084       5,423  

Property and equipment, net of accumulated depreciation

     19,302       20,208  

Goodwill and intangible assets

     68,969       70,382  

Deferred tax asset

     11,281       12,722  

Other real estate owned

     9,900       12,068  

Bank-owned life insurance

     35,840       35,165  

Other assets

     4,328       4,940  
  

 

 

   

 

 

 

Total assets

   $ 2,546,623     $ 2,541,437  
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits

    

Noninterest-bearing demand

   $ 906,015     $ 858,996  

Savings and interest-bearing checking

     1,055,648       1,110,224  

Core time deposits

     54,625       65,847  
  

 

 

   

 

 

 

Total core deposits

     2,016,288       2,035,067  

Other deposits

     81,869       113,036  
  

 

 

   

 

 

 

Total deposits

     2,098,157       2,148,103  

Securities sold under agreements to repurchase

     2,031       1,966  

Federal Home Loan Bank borrowings

     101,000       65,000  

Subordinated debentures

     34,167       34,096  

Junior subordinated debentures

     11,428       11,311  

Accrued interest and other payables

     9,262       7,206  
  

 

 

   

 

 

 

Total liabilities

     2,256,045       2,267,682  
  

 

 

   

 

 

 

Shareholders’ equity

    

Common stock, no par value, shares authorized: 50,000,000; shares issued and outstanding: 22,772,400 at September 30, 2017, and 22,611,535 at December 31, 2016

     205,961       205,584  

Retained earnings

     85,286       70,486  

Accumulated other comprehensive loss

     (669     (2,315
  

 

 

   

 

 

 
     290,578       273,755  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,546,623     $ 2,541,437  
  

 

 

   

 

 

 

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
September 30,
    Nine months ended
September 30,
 
     2017     2016     2017     2016  

Interest and dividend income

        

Loans

   $ 23,916     $ 20,145     $ 71,282     $ 55,810  

Taxable securities

     2,247       1,995       6,819       5,551  

Tax-exempt securities

     498       482       1,510       1,435  

Interest-bearing deposits with banks

     149       40       335       104  
  

 

 

   

 

 

   

 

 

   

 

 

 
     26,810       22,662       79,946       62,900  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Deposits

     1,216       984       3,597       2,678  

Federal Home Loan Bank borrowings

     398       286       1,205       758  

Subordinated debentures

     590       553       1,735       553  

Junior subordinated debentures

     105       66       293       179  

Federal funds purchased

     —         2       1       6  
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,309       1,891       6,831       4,174  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     24,501       20,771       73,115       58,726  

Provision for loan losses

     350       1,380       3,725       3,575  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     24,151       19,391       69,390       55,151  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Service charges on deposit accounts

     686       717       2,119       2,099  

Bankcard income

     338       314       968       899  

Bank-owned life insurance income

     226       172       675       463  

Net gain on sale of investment securities

     —         —         —         309  

Impairment losses on investment securities (OTTI)

     (7     (2     (9     (19

Other noninterest income

     645       718       2,797       1,726  
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,888       1,919       6,550       5,477  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and employee benefits

     7,554       7,520       25,830       23,084  

Property and equipment

     1,323       1,202       3,929       3,404  

Data processing

     1,062       924       3,137       2,682  

Legal and professional services

     576       569       1,789       2,321  

Business development

     319       460       1,299       1,492  

FDIC insurance assessment

     297       273       989       848  

Other real estate expense (income)

     48       71       20       (32

Merger related expense

     176       1,767       1,429       3,745  

Other noninterest expense

     1,453       1,039       3,846       3,222  
  

 

 

   

 

 

   

 

 

   

 

 

 
     12,808       13,825       42,268       40,766  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     13,231       7,485       33,672       19,862  

Provision for income taxes

     4,606       2,634       11,370       6,946  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 8,625     $ 4,851     $ 22,302     $ 12,916  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic

   $ 0.38     $ 0.24     $ 0.98     $ 0.65  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.38     $ 0.23     $ 0.97     $ 0.64  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     22,772,393       20,511,392       22,719,181       19,940,709  

Common stock equivalents attributable to stock-based awards

     167,018       165,572       162,032       154,813  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     22,939,411       20,676,964       22,881,213       20,095,522  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

     Three months ended     Nine months ended  
     September 30,     September 30,  
     2017     2016     2017     2016  

Net income

   $ 8,625     $ 4,851     $ 22,302     $ 12,916  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

        

Available-for-sale securities:

        

Unrealized gain (loss) arising during the period

     17       (1,929     2,781       5,397  

Reclassification adjustment for gains realized in net income

     —         —         —         (309

Other than temporary impairment

     7       2       9       19  

Income tax effects

     (9     751       (1,088     (1,991

Derivative agreements—cash flow hedge

         —      

Unrealized gain (loss) arising during the period

     —         160       (14     (944

Reclassification adjustment for gains realized in net income

     —         —         35       —    

Income tax effects

     —         (62     (77     368  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     15       (1,078     1,646       2,540  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 8,640     $ 3,773     $ 23,948     $ 15,456  
  

 

 

   

 

 

   

 

 

   

 

 

 

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 (loss)
    Total  

Balance, December 31, 2015

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          19,776         19,776  

Other comprehensive loss, net of tax

            (5,014     (5,014
         

 

 

   

 

 

 

Comprehensive income

              14,762  
           

 

 

 

Stock issuance and related tax benefit

     153,991        734           734  

Stock issued through acquisition

     2,853,362        47,794           47,794  

Share-based compensation expense

        1,853           1,853  

Vested employee RSUs and SARs surrendered to cover tax consequences

        (896         (896

Cash dividends ($0.44 per share)

          (8,983       (8,983
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2016

     22,611,535      $ 205,584     $ 70,486     $ (2,315   $ 273,755  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          22,302         22,302  

Other comprehensive income, net of tax

            1,646       1,646  
         

 

 

   

 

 

 

Comprehensive income

              23,948  
           

 

 

 

Stock issuance

     160,865        861           861  

Share-based compensation expense

        1,042           1,042  

Vested employee RSUs and SARs surrendered to cover tax consequences

        (1,526         (1,526

Cash dividends ($.33 per share)

          (7,502       (7,502
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2017

     22,772,400      $ 205,961     $ 85,286     $ (669     290,578  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

6


Table of Contents

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Nine months ended  
     September 30,  
     2017     2016  

Cash flows from operating activities:

    

Net income

   $ 22,302     $ 12,916  

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

    

Depreciation and amortization, net of accretion

     5,947       4,919  

Deferred income taxes

     (1     3  

Bank-owned life insurance income

     (675     (469

Share-based compensation

     1,192       1,427  

Provision for loan losses

     3,725       3,575  

Gain on sale of investment securities

     —         (309

Valuation adjustment on foreclosed assets

     —         162  

Gain on sale of foreclosed assets

     (91     (302

Other than temporary impairment on investment securities

     9       19  

Change in:

    

Interest receivable

     605       698  

Deferred loan fees

     (169     381  

Accrued interest payable and other liabilities

     2,094       (1,991

Other assets

     1,520       (1,073
  

 

 

   

 

 

 

Net cash provided by operating activities

     36,458       19,956  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

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

     41,529       135,319  

Purchase of available-for-sale investment securities

     (25,308     (160,943

Net loan principal originations

     (27,905     (133,405

Proceeds from sale of foreclosed assets

     2,442       1,371  

Net purchase of property and equipment

     (342     (2,196

(Purchase) Redemption of Federal Home Loan Bank stock

     (1,661     1,097  

Cash consideration received, net of cash acquired in merger

     —         43,855  
  

 

 

   

 

 

 

Net cash used by investing activities

     (11,245     (114,902
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Change in deposits

     (49,946     169,032  

Change in repurchase agreements

     65       1,036  

Change in Federal Home Loan Bank short-term borrowings

     36,000       (19,500

FHLB term advances paid off

     —         (12,500

Proceeds from stock options exercised

     861       620  

Excess tax benefit from stock options exercised

     —         41  

Proceeds from subordinated debenture issuance

     —         34,072  

Dividends paid

     (7,502     (6,497

Vested employee RSUs and SARs surrendered to cover tax consequences

     (1,526     (861
  

 

 

   

 

 

 

Net cash (used)/provided by financing activities

     (22,048     165,443  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     3,165       70,497  

Cash and cash equivalents, beginning of period

     67,113       36,675  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 70,278     $ 107,172  
  

 

 

   

 

 

 

Supplemental information:

    

Noncash investing and financing activities:

    

Transfer of loans to other real estate owned

   $ 183     $ 958  

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

   $ (1,187   $ 3,116  

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

   $ —       $ (576

Cash paid during the period for:

    

Income taxes

   $ 9,098     $ 7,667  

Interest

   $ 6,336     $ 3,653  

See accompanying notes.

 

7


Table of Contents

Pacific Continental Corporation and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

A complete set of Notes to the Consolidated Financial Statements is a part of the Company’s 2016 Form 10-K, as amended. 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.

On January 9, 2017, Pacific Continental Corporation entered into a definitive agreement to merge with Columbia Banking System, Inc., headquartered in Tacoma, Washington (“Columbia”). Upon completion of the merger, the combined company will operate under the Columbia Bank name and brand. The agreement was approved by the Board of Directors of each company. Closing of the transaction, which occurred on November 1, 2017 was contingent on satisfaction of customary closing conditions.

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. Material estimates particularly susceptible to material change include allowance for loan losses, goodwill and intangibles and other real estate owned are particularly susceptible to change, and actual results could differ from those estimates.

The balance sheet data as of December 31, 2016, was derived from audited consolidated financial statements, but does not include all disclosures contained in the Company’s 2016 Form 10-K. The interim consolidated financial statements should be read in conjunction with the December 31, 2016, consolidated financial statements, including the notes thereto, included in the Company’s 2016 Form 10-K.

 

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Table of Contents

NOTE 2 – SECURITIES AVAILABLE-FOR-SALE

The amortized cost and estimated fair values of securities available-for-sale at September 30, 2017, 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

   $ 2,000      $ —        $ (25   $ 1,975        0.44

Obligations of states and political subdivisions

     27,060        —          (513     26,547        5.85

Private-label mortgage-backed securities

     10        —          —         10        0.00

Mortgage-backed securities

     233,868        —          (4,113     229,755        50.64

SBA pools

     19,649        —          (298     19,351        4.27
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 282,587      $ —        $ (4,949   $ 277,638        61.20
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
Unrealized Gain Positions              

Obligations of U.S. government agencies

   $ 23,270      $ 425      $ —       $ 23,695        5.22

Obligations of states and political subdivisions

     81,446        2,481        —         83,927        18.50

Private-label mortgage-backed securities

     1,309        199        —         1,508        0.33

Mortgage-backed securities

     48,558        552        —         49,110        10.83

SBA pools

     17,586        196        —         17,782        3.92
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 172,169      $ 3,853      $ —       $ 176,022        38.80
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 454,756      $ 3,853      $ (4,949   $ 453,660        100.00
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

At September 30, 2017, the Bank held 469 investment securities, of which 167 were in unrealized loss positions. Unrealized losses existed on certain securities classified as obligations of U.S. government agencies, private-label mortgage-backed securities, mortgage-backed securities, SBA pools and obligations of states and political subdivisions. 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 September 30, 2017.

 

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Table of Contents

The following table presents a summary of securities in a continuous unrealized loss position at September 30, 2017:

 

     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

   $ 1,975      $ (25    $ —        $ —    

Obligations of states and political subdivisions

     12,204        (152      14,343        (361

Private-label mortgage-backed securities

     10        —          —          —    

Mortgage-backed securities

     171,984        (2,580      57,771        (1,533

SBA pools

     7,949        (102      11,402        (196
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 194,122      $ (2,859    $ 83,516      $ (2,090
  

 

 

    

 

 

    

 

 

    

 

 

 

On a monthly basis, management reviews all private-label mortgage-backed securities for the presence of other than temporary impairment (“OTTI”). The Bank recorded $9 and $19 of OTTI during the nine months ended September 30, 2017 and 2016, respectively, with $7 and $2 of additional OTTI booked during the three months ended September 30, 2017 and 2016, 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 months and nine months ended September 30, 2017 and 2016:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2017      2016      2017      2016  

Balance, beginning of period:

   $ 272      $ 266      $ 270      $ 249  

Additions:

           

Initial OTTI credit loss

     7        2        9        19  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period:

   $ 279      $ 268      $ 279      $ 268  
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2017, nine of the Company’s private-label mortgage-backed securities, with an aggregate amortized cost of $1,055, were classified as substandard as their underlying credit was considered impaired. At December 31, 2016, nine securities with an aggregate amortized cost of $1,338 were classified as substandard.

At September 30, 2017 and December 31, 2016, the projected average life of the securities portfolio was 4.51 years and 4.94 years, respectively.

 

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Table of Contents

The amortized cost and estimated fair values of securities available-for-sale at December 31, 2016, 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

   $ 3,995      $ —        $ (49   $ 3,946        0.84

Obligations of states and political subdivisions

     41,016        —          (1,279     39,737        8.44

Private-label mortgage-backed securities

     241        —          (23     218        0.05

Mortgage-backed securities

     221,835        —          (5,362     216,473        45.96

SBA pools

     26,758        —          (493     26,265        5.58
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 293,845      $ —        $ (7,206   $ 286,639        60.86
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
Unrealized Gain Positions              

Obligations of U.S. government agencies

   $ 21,290      $ 384      $ —       $ 21,674        4.60

Obligations of states and political subdivisions

     69,148        1,854        —         71,002        15.07

Private-label mortgage-backed securities

     1,566        153        —         1,719        0.36

Mortgage-backed securities

     72,752        811        —         73,563        15.62

SBA pools

     16,281        118        —         16,399        3.48
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 181,037      $ 3,320      $ —       $ 184,357        39.14
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 474,882      $ 3,320      $ (7,206   $ 470,996        100.00
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

At December 31, 2016, the Bank held 485 investment securities, of which 179 were in unrealized loss positions. The following table presents a summary of securities in a continuous unrealized loss position at December 31, 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
 

Obligations of U.S. government agencies

   $ 3,946      $ (49    $ —        $ —    

Obligations of states and political subdivisions

     39,737        (1,279      —          —    

Private-label mortgage-backed securities

     —          —          218        (23

Mortgage-backed securities

     211,721        (5,266      4,752        (96

SBA pools

     22,076        (458      4,189        (35
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 277,480      $ (7,052    $ 9,159      $ (154
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The amortized cost and estimated fair value of securities at September 30, 2017, 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.

 

     September 30, 2017  
     Amortized
Cost
     Estimated
Fair

Value
 

Due in one year or less

   $ 24,349      $ 24,340  

Due after one year through 5 years

     237,873        237,754  

Due after 5 years through 10 years

     156,651        155,892  

Due after 10 years

     35,883        35,674  
  

 

 

    

 

 

 
   $ 454,756      $ 453,660  
  

 

 

    

 

 

 

During the quarter ended September 30, 2017, there were no investment securities sold.

During the quarter ended September 30, 2016, 30 investment securities were sold resulting in proceeds of $54,426. The sales generated a gross gain of $552 and a gross loss of $243, totaling a net gain of $309.

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

 

     September 30, 2017      December 31, 2016  
     Amortized
Cost
     Estimated
Fair

Value
     Amortized
Cost
     Estimated
Fair

Value
 

Pledged to secure public deposits

   $ 23,025      $ 23,630      $ 25,257      $ 25,683  

Pledged to secure repurchase agreements

     4,973        4,944        3,579        3,573  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 27,998      $ 28,574      $ 28,836      $ 29,256  
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2017 and December 31, 2016, there was an outstanding balance for repurchase agreements of $2,031 and $1,966, 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:

 

     September 30,
2017
    % of Gross
Loans
    December 31,
2016
    % of Gross
Loans
 

Real estate loans

        

Multi-family residential

   $ 85,732       4.55   $ 74,340       4.00

Residential 1-4 family

     61,379       3.26     61,548       3.31

Owner-occupied commercial

     465,536       24.70     461,557       24.82

Nonowner-occupied commercial

     453,895       24.08     451,893       24.30
  

 

 

   

 

 

   

 

 

   

 

 

 

Total permanent real estate loans

     1,066,542       56.59     1,049,338       56.43

Construction loans

        

Multi-family residential

     19,711       1.05     22,252       1.20

Residential 1-4 family

     48,274       2.56     43,532       2.34

Commercial real estate

     96,426       5.12     76,301       4.10

Commercial bare land and acquisition & development

     8,635       0.46     15,081       0.81

Residential bare land and acquisition & development

     8,836       0.47     10,645       0.57
  

 

 

   

 

 

   

 

 

   

 

 

 

Total construction real estate loans

     181,882       9.66     167,811       9.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     1,248,424       66.25     1,217,149       65.45

Commercial loans

     619,266       32.85     630,491       33.89

Consumer loans

     2,855       0.15     2,922       0.16

Other loans

     14,148       0.75     9,225       0.50
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans

     1,884,693       100.00     1,859,787       100.00

Deferred loan origination fees

     (1,851       (2,020  
  

 

 

     

 

 

   
     1,882,842         1,857,767    

Allowance for loan losses

     (23,363       (22,454  
  

 

 

     

 

 

   

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

   $ 1,859,479       $ 1,835,313    
  

 

 

     

 

 

   

At September 30, 2017, outstanding loans to dental professionals totaled $390,333 and represented 20.71% of total outstanding loan principal balances compared to dental professional loans of $377,478, or 20.30% of total outstanding loan principal balance, at December 31, 2016. Additional information about the Company’s dental portfolio can be found in Note 4 to these consolidated financial statements. As of September 30, 2017, there were no other industry concentrations in excess of 10% of the total loan portfolio. However, as of September 30, 2017, 66.25% of the Company’s loan portfolio was collateralized by real estate and is, therefore, susceptible to change based on 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 September 30, 2017 and December 31, 2016:

 

     September 30,
2017
     December 31,
2016
 

Contractually required principal payments for purchased credit impaired loans

   $ 18,883      $ 22,941  

Accretable yield

     (1,173      (1,453

Nonaccretable yield

     (582      (809
  

 

 

    

 

 

 

Balance of purchased credit impaired loans

   $ 17,128      $ 20,679  
  

 

 

    

 

 

 

The following tables summarize the changes in the accretable yield for purchased credit impaired loans for the three and nine months ended September 30, 2017 and 2016:

 

     Three months ended September 30,  
     2017     2016  
     Capital
Pacific
    Foundation     Total     Century     Capital
Pacific
    Foundation     Total  

Balance, beginning of period

   $ 682     $ 1,324     $ 2,006     $ —       $ 860     $ —       $ 860  

Additions

     —         —         —         —         —         908       908  

Accretion to interest income

     (45     (46     (91     —         (50     (22     (72
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 637     $ 1,278     $ 1,915     $ —       $ 810     $ 886     $ 1,696  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Nine months ended September 30,  
     2017     2016  
     Capital
Pacific
    Foundation     Total     Century     Capital
Pacific
    Foundation     Total  

Balance, beginning of period

   $ 765     $ 688     $ 1,453     $ 39     $ 1,030     $ —       $ 1,069  

Additions

     —         742       742       —         —         908       908  

Accretion to interest income

     (128     (152     (280     (39     (220     (22     (281
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 637     $ 1,278     $ 1,915     $ —       $ 810     $ 886     $ 1,696  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 September 30, 2017  
     Commercial
and Other
    Real Estate     Construction     Consumer     Unallocated     Total  

Beginning balance

   $ 8,693     $ 11,699     $ 2,142     $ 41     $ 876     $ 23,451  

Charge-offs

     (516     —         —         (7     —         (523

Recoveries

     30       54       1       —         —         85  

Provision (reclassification)

     481       60       (134     4       (61     350  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 8,688     $ 11,813     $ 2,009     $ 38     $ 815     $ 23,363  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     For the nine months ended September 30, 2017  
     Commercial
and Other
    Real Estate     Construction     Consumer     Unallocated     Total  

Beginning balance

   $ 8,614     $ 10,872     $ 1,781     $ 41     $ 1,146     $ 22,454  

Charge-offs

     (2,844     (150     —         (12     —         (3,006

Recoveries

     90       97       2       1       —         190  

Provision (reclassification)

     2,828       994       226       8       (331     3,725  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 8,688     $ 11,813     $ 2,009     $ 38     $ 815     $ 23,363  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2017, the allowance for loan losses on dental loans was $5,373, compared to $4,713 at December 31, 2016. 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 September 30, 2017 and December 31, 2016:

 

     Balances as of September 30, 2017  
     Commercial
and Other
     Real Estate      Construction      Consumer      Unallocated      Total  

Ending allowance: collectively evaluated for impairment

   $ 8,679      $ 11,813      $ 2,009      $ 38      $ 815      $ 23,354  

Ending allowance: individually evaluated for impairment

     9        —          —          —          —          9  

Ending allowance: loans acquired with deteriorated credit quality

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 8,688      $ 11,813      $ 2,009      $ 38      $ 815      $ 23,363  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending loan balance: collectively evaluated for impairment

   $ 626,451      $ 1,046,756      $ 181,882      $ 2,855      $ —        $ 1,857,944  

Ending loan balance: individually evaluated for impairment

     2,105        7,516        —          —          —          9,621  

Ending loan balance: loans acquired with deteriorated credit quality

     4,858        12,270        —          —          —          17,128  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 633,414      $ 1,066,542      $ 181,882      $ 2,855      $ —        $ 1,884,693  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                   Balances as of December 31, 2016         
     Commercial
and Other
     Real Estate      Construction      Consumer      Unallocated      Total  

Ending allowance: collectively evaluated for impairment

   $ 7,881      $ 10,869      $ 1,781      $ 41      $ 1,146      $ 21,718  

Ending allowance: individually evaluated for impairment

     733        3        —          —          —          736  

Ending allowance: loans acquired with deteriorated credit quality

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 8,614      $ 10,872      $ 1,781      $ 41      $ 1,146      $ 22,454  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending loan balance: collectively evaluated for impairment

   $ 628,773      $ 1,027,354      $ 167,491      $ 2,922      $ —        $ 1,826,540  

Ending loan balance: individually evaluated for impairment

     4,396        7,852        320        —          —          12,568  

Ending loan balance: loans acquired with deteriorated credit quality

     6,547        14,132        —          —          —          20,679  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 639,716      $ 1,049,338      $ 167,811      $ 2,922      $ —        $ 1,859,787  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The September 30, 2017, ending allowance includes $9 in specific allowance for $9,621 of impaired loans ($7,260 net of government guarantees). At December 31, 2016, the Company had $12,568 of impaired loans ($10,567 net of government guarantees) with a specific allowance of $736.

Management believes that the allowance for loan losses was adequate as of September 30, 2017. 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 ranges between the highest credit quality to average credit quality. Primary repayment sources generate satisfactory debt service coverage under normal conditions. Cash flow from recurring sources is expected to continue to produce adequate debt service capacity. There are many levels of credit quality contained in the Pass definition, but none of the loans contained in this category rise to the level of Special Mention. This category includes loans with an internal risk rating of 1-6.

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

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

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

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

 

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The following tables present the Company’s loan portfolio information by loan type and credit grade at September 30, 2017 and December 31, 2016:

Credit Quality Indicators

As of September 30, 2017

 

     Loan Grade        
     Pass     Special Mention     Substandard     Doubtful     Totals  

Real estate loans

          

Multi-family residential

   $ 85,732     $ —       $ —       $ —       $ 85,732  

Residential 1-4 family

     60,094       —         1,285       —         61,379  

Owner-occupied commercial

     446,902       —         18,634       —         465,536  

Nonowner-occupied commercial

     449,306       —         4,589       —         453,895  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     1,042,034       —         24,508       —         1,066,542  

Construction

          

Multi-family residential

     19,711       —         —         —         19,711  

Residential 1-4 family

     48,274       —         —         —         48,274  

Commercial real estate

     96,426       —         —         —         96,426  

Commercial bare land and acquisition & development

     8,635       —         —         —         8,635  

Residential bare land and acquisition & development

     8,286       —         550       —         8,836  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction loans

     181,332       —         550       —         181,882  

Commercial and other

     618,016       —         15,398       —         633,414  

Consumer

     2,855       —         —         —         2,855  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

   $ 1,844,237     $ —       $ 40,456     $ —       $ 1,884,693  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of portfolio

     97.85     0.00     2.15     0.00     100.00

Credit Quality Indicators

As of December 31, 2016

 

 

     Loan Grade        
     Pass     Special Mention     Substandard     Doubtful     Totals  

Real estate loans

          

Multi-family residential

   $ 74,340     $ —       $ —       $ —       $ 74,340  

Residential 1-4 family

     58,286       —         3,262       —         61,548  

Owner-occupied commercial

     443,737       —         17,820       —         461,557  

Nonowner-occupied commercial

     445,283       —         6,610       —         451,893  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     1,021,646       —         27,692       —         1,049,338  

Construction

          

Multi-family residential

     22,252       —         —         —         22,252  

Residential 1-4 family

     43,532       —         —         —         43,532  

Commercial real estate

     76,301       —         —         —         76,301  

Commercial bare land and acquisition & development

     15,081       —         —         —         15,081  

Residential bare land and acquisition & development

     9,852       —         793       —         10,645  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction loans

     167,018       —         793       —         167,811  

Commercial and other

     621,165       —         16,890       1,661       639,716  

Consumer

     2,922       —         —         —         2,922  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

   $ 1,812,751     $ —       $ 45,375     $ 1,661     $ 1,859,787  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of portfolio

     97.47     0.00     2.44     0.09     100.00

At September 30, 2017 and December 31, 2016, the Company had $941 and $1,026, respectively, in unfunded commitments on its classified loans, which amounts are 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 September 30, 2017 and December 31, 2016:

Age Analysis of Loans Receivable

As of September 30, 2017

 

     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

   $ —        $ —        $ —        $ —        $ —        $ 85,732      $ 85,732  

Residential 1-4 family

     —          —          —          185        185        60,478        60,663  

Owner-occupied commercial

     837        —          —          519        1,356        455,671        457,027  

Nonowner-occupied commercial

     —          —          1,428        531        1,959        448,893        450,852  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     837        —          1,428        1,235        3,500        1,050,774        1,054,274  

Construction

                    

Multi-family residential

     —          —          —          —          —          19,711        19,711  

Residential 1-4 family

     —          —          —          —          —          48,274        48,274  

Commercial real estate

     —          —          —          —          —          96,426        96,426  

Commercial bare land and acquisition & development

     199        —          —          —          199        8,437        8,636  

Residential bare land and acquisition & development

     —          —          —          —          —          8,835        8,835  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     199        —          —          —          199        181,683        181,882  

Commercial and other

     696        —          —          1,479        2,175        626,379        628,554  

Consumer

     9        2        —          —          11        2,844        2,855  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,741      $ 2      $ 1,428      $ 2,714      $ 5,885      $ 1,861,680      $ 1,867,565  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Age Analysis of Loans Receivable

As of December 31, 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

   $ —        $ —        $ —        $ —        $ —        $ 74,340      $ 74,340  

Residential 1-4 family

     —          —          —          158        158        59,241        59,399  

Owner-occupied commercial

     —          —          —          —          —          452,748        452,748  

Nonowner-occupied commercial

     —          —          —          601        601        448,118        448,719  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     —          —          —          759        759        1,034,447        1,035,206  

Construction

                    

Multi-family residential

     —          —          —          —          —          22,252        22,252  

Residential 1-4 family

     —          —          —          —          —          43,532        43,532  

Commercial real estate

     —          —          —          —          —          76,301        76,301  

Commercial bare land and acquisition & development

     —          —          —          —          —          15,081        15,081  

Residential bare land and acquisition & development

     —          —          —          —          —          10,645        10,645  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —          —          —          —          —          167,811        167,811  

Commercial and other

     363        366        —          2,794        3,523        629,646        633,169  

Consumer

     —          —          —          —          —          2,922        2,922  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 363      $ 366      $ —        $ 3,553      $ 4,282      $ 1,834,826      $ 1,839,108  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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.

 

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Table of Contents

The following tables display an analysis of the Company’s impaired loans at September 30, 2017, and December 31, 2016:

Impaired Loan Analysis

As of September 30, 2017

 

     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

     100        —          100        100        101        —    

Owner-occupied commercial

     5,456        —          5,456        5,456        5,467        —    

Nonowner-occupied commercial

     1,960        —          1,960        1,959        1,999        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     7,516        —          7,516        7,515        7,567        —    

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

     1,627        478        2,105        3,986        2,596        9  

Consumer

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 9,143      $ 478      $ 9,621      $ 11,501      $ 10,163      $ 9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loan Analysis

As of December 31, 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

     454        300        754        775        644        1  

Owner-occupied commercial

     4,106        865        4,971        4,971        1,804        2  

Nonowner-occupied commercial

     2,127        —          2,127        2,189        2,228        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     6,687        1,165        7,852        7,935        4,676        3  

Construction

                 

Multi-family residential

     —          —          —          —          —          —    

Residential 1-4 family

     —          —          —          —          37        —    

Commercial real estate

     —          —          —          —          —          —    

Commercial bare land and acquisition & development

     —          —          —          —          —          —    

Residential bare land and acquisition & development

     320        —          320        320        1,556        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     320        —          320        320        1,593        —    

Commercial and other

     2,255        2,141        4,396        4,767        3,518        733  

Consumer

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 9,262      $ 3,306      $ 12,568      $ 13,022      $ 9,787      $ 736  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The impaired balances reported above are not adjusted for government guarantees of $2,361 and $2,001 at September 30, 2017 and December 31, 2016, respectively. The recorded investment in impaired loans, net of government guarantees, totaled $7,260 and $10,567 at September 30, 2017, and December 31, 2016, 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 September 30, 2017 and December 31, 2016:

 

    

Troubled Debt Restructurings as of

 
     September 30, 2017      December 31, 2016  
     Number of
Contracts
     Post-Modification
Outstanding Recorded
Investment
     Number of
Contracts
     Post-Modification
Outstanding Recorded
Investment
 

Real estate

           

Multifamily residential

     —        $ —          —        $ —    

Residential 1-4 family

     1        100        4        754  

Owner-occupied commercial

     4        5,215        4        5,447  

Non owner-occupied commercial

     5        1,959        6        2,127  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     10        7,274        14        8,328  

Construction

           

Multifamily residential

     —          —          —          —    

Residential 1-4 family

     —          —          —          —    

Commercial real estate

     —          —          —          —    

Commercial bare land and acquisition & development

     —          —          —          —    

Residential bare land and acquisition & development

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction loans

     —          —          —          —    

Commercial and other

     15        2,142        16        2,901  

Consumer

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     25      $ 9,416        30      $ 11,229  
  

 

 

    

 

 

    

 

 

    

 

 

 

The recorded investment in TDRs on nonaccrual status totaled $1,630 and $2,250 at September 30, 2017 and December 31, 2016, 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 nine months ended September 30, 2017, the Company restructured one loan into a TDR 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 nine months ended September 30, 2017.

 

     Troubled Debt Restructurings Identified During
the nine months ended September 30, 2017
 
     Rate
Modification
     Term
Modification
     Interest-only
Modification
     Combination
Modification
 

Real estate

           

Multi-family residential

   $ —        $ —        $ —        $ —    

Residential 1-4 family

     —          —          —          50  

Owner-occupied commercial

     —          —          —          —    

Nonowner-occupied commercial

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     —          —          —          50  

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

   $ —        $ —        $ —        $ 50  
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no TDRs identified in the three months ended September 30, 2017.

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.

 

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Table of Contents

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 nine months ended September 30,
 
     2017      2016  
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 

Real estate

           

Multi-family residential

     —        $ —          —        $ —    

Residential 1-4 family

     —          —          —          —    

Owner-occupied commercial

     —          —          1        444  

Nonowner-occupied commercial

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     —          —          1        444  

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      $ 444  
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2017 and December 31, 2016, the Company had no commitments to lend additional funds on loans restructured as TDRs.

NOTE 4 – DENTAL LOAN PORTFOLIO

Dental lending is not operated as a business segment, and dental loans are made in the normal course of commercial lending activities throughout the Company. However, to assist in understanding the concentrations and risks associated with the Company’s loan portfolio, the following Note has been included to provide additional information relating to the Company’s dental loan portfolio. At September 30, 2017 and December 31, 2016, loans to dental professionals totaled $390,333 and $377,478, respectively, and represented 20.71% and 20.30% in principal amount of total outstanding loans, respectively. As of September 30, 2017 and December 31, 2016, dental loans were supported by government guarantees totaling $4,658 and $5,641, respectively. These guarantees represented 1.19% and 1.49% in principal amount of the outstanding dental loan balances as of such respective dates. The Company defines a “dental loan” as a loan to dental professionals for the purpose of practice expansion, acquisition or other purpose supported by the cash flows of a dental practice.

 

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Table of Contents

Loan Classification

Major classifications of dental loans at September 30, 2017 and December 31, 2016, were as follows:

 

     September 30,
2017
     December 31,
2016
 

Real estate secured loans:

     

Owner-occupied commercial

   $ 62,376      $ 63,793  

Other dental real estate loans

     358        806  
  

 

 

    

 

 

 

Total permanent real estate loans

     62,734        64,599  

Dental construction loans

     10,130        4,109  
  

 

 

    

 

 

 

Total real estate loans

     72,864        68,708  

Commercial loans

     317,469        308,770  
  

 

 

    

 

 

 

Gross loans

   $ 390,333      $ 377,478  
  

 

 

    

 

 

 

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 the Puget Sound. The Company also makes national dental loans throughout the United States, and currently has dental loans in 45 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:

 

     September 30,
2017
     December 31,
2016
 

Local

   $ 154,061      $ 150,268  

National

     236,272        227,210  
  

 

 

    

 

 

 

Total

   $ 390,333      $ 377,478  
  

 

 

    

 

 

 

 

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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      Nine months ended  
     September 30,      September 30,  
     2017      2016      2017      2016  

Balance, beginning of period

   $ 5,257      $ 4,151      $ 4,713      $ 4,022  

Provision

     120        601        2,924        704  

Charge-offs

     (50      (9      (2,325      (9

Recoveries

     46        55        61        81  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 5,373      $ 4,798      $ 5,373      $ 4,798  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2017 and December 31, 2016:

 

As of September 30, 2017

 

 
     Loan Grade         
     Pass      Special Mention      Substandard      Doubtful      Totals  

Local

   $ 151,696      $ —        $ 2,365      $ —        $ 154,061  

National

     235,090        —          1,182        —          236,272  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 386,786      $ —        $ 3,547      $ —        $ 390,333  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2016

 

 
     Loan Grade         
     Pass      Special Mention      Substandard      Doubtful      Totals  

Local

   $ 148,805      $ —        $ 1,463      $ —        $ 150,268  

National

     224,493        —          1,056        1,661        227,210  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 373,298      $ —        $ 2,519      $ 1,661      $ 377,478  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 September 30, 2017 and December 31, 2016:

 

As of September 30, 2017

 

 
     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

   $ 74      $ —        $ —        $ 358      $ 432      $ 153,629      $ 154,061  

National

     —          —          —          767        767        235,505        236,272  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 74      $ —        $ —        $ 1,125      $ 1,199      $ 389,134      $ 390,333  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 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

   $ —        $ —        $ —        $ 407      $ 407      $ 149,861      $ 150,268  

National

     263        366        —          1,660        2,289        224,921        227,210  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 263      $ 366      $ —        $ 2,067      $ 2,696      $ 374,782      $ 377,478  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTE 5 – SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

The Company sells certain securities under agreements to repurchase with its customers. The agreements transacted with its customers are utilized as an overnight investment product. The amounts received under these agreements represent short-term borrowings and are reflected as a liability in the consolidated balance sheets. The securities underlying these agreements are included in investment securities in the consolidated balance sheets. The Company has no control over the market value of the securities, which fluctuates due to market conditions. However, the Company is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. The Company manages this risk by maintaining an unpledged securities portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase. All securities sold under agreements to repurchase had a daily maturity date. See Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-Q for additional information regarding the securities pledged under agreements to repurchase.

The following table presents information regarding securities sold under agreements to repurchase at September 30, 2017 and December 31, 2016:

 

     September 30,
2017
    December 31,
2016
 

Balance at end of period

   $ 2,031     $ 1,966  

Average balance outstanding for the period

     2,134       702  

Maximum amount outstanding at any month end during the period

     3,100       2,017  

Weighted average interest rate for the period

     0.08     0.06

Weighted average interest rate at period end

     0.07     0.08

NOTE 6 – FEDERAL FUNDS AND OVERNIGHT FUNDS PURCHASED

The Company had unsecured federal funds borrowing lines with various correspondent banks totaling $154,000 at September 30, 2017 and $154,000 at December 31, 2016. The terms of the lines are subject to change with interest payable at the then stated rate. At September 30, 2017 and December 31, 2016, 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 $87,965 and $80,784 at September 30, 2017 and December 31, 2016, respectively. The Federal Reserve Bank borrowing line is secured through the pledging of $142,321 and $143,679 at September 30, 2017 and December 31, 2016, respectively, of commercial loans under the Company’s Borrower-In-Custody program. At September 30, 2017 and December 31, 2016, 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.

NOTE 7 – 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 September 30, 2017, the maximum borrowing line was $891,318; however, the FHLB borrowing line was limited by the discounted value of collateral pledged. At September 30, 2017, the Company had pledged $896,580 in real estate loans to the FHLB that had a discounted collateral value of $632,226. There was $101,000 borrowed on this line at September 30, 2017.

At December 31, 2016, the maximum borrowing line was $889,503; however, the FHLB borrowing line was limited by the discounted value of collateral pledged. At December 31, 2016, the Company had pledged $867,596 in real estate loans to the FHLB that had a discounted collateral value of $632,202. There was $65,000 borrowed on this line at December 31, 2016.

 

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Table of Contents

Below is a summary of outstanding FHLB borrowings by maturity.

 

     Current
Rates
     September 30,
2017
 

Cash management advance

     NA      $ 96,000  

2017

     0        —    

2018

     1.55        3,000  

2019

     0        —    

2020

     0        —    

2021

     0        —    

Thereafter

     3.85        2,000  
     

 

 

 
      $ 101,000  
     

 

 

 

NOTE 8 – BORROWED FUNDS

Subordinated Debentures

In June 2016, the Company issued $35,000 in aggregate principal amount of fixed-to-floating rate subordinated debentures (the “Notes”) in a public offering. The Notes are callable at par after five years, have a stated maturity of September 30, 2026 and bear interest at a fixed annual rate of 5.875% per year, from and including June 27, 2016, but excluding September 30, 2021. From and including September 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.

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 $8,000 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 2035, but are callable by the Company at par any time after January 7, 2011. The Company issued $8,248 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.

On September 6, 2016, the Company completed the acquisition of Foundation Bancorp, Inc. At that time, the Company assumed ownership of Foundation Statutory Trust I, which had previously issued $6,000 in aggregate liquidation amount of trust preferred securities. The interest rate on these trust preferred securities is a floating rate of three-month LIBOR plus 173 basis points. The Company also acquired $6,148 of junior subordinated debentures (the “Foundation Debentures”) issued to the trust in exchange for ownership of all of the common securities 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 Foundation Debentures are shown as a liability, and acquired at an acquisition date fair value of $3,013.

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

 

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Table of Contents

NOTE 9 – 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 identifies the compensation expense recorded and tax benefits received by the Company on its share-based compensation plans for the three and nine months ended September 30, 2017 and 2016:

 

    

Three months ended

 
    

September 30,

 
     2017      2016  
     Compensation
Expense
     Tax Benefit      Compensation
Expense
     Tax Benefit  

Equity-based awards:

           

Employee RSUs

   $ 315      $ 120      $ 397      $ 151  

Liability-based awards:

           

Employee cash SARs

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 315      $ 120      $ 397      $ 151  
  

 

 

    

 

 

    

 

 

    

 

 

 
    

Nine months ended

 
    

September 30,

 
     2017      2016  
     Compensation
Expense
     Tax Benefit      Compensation
Expense
     Tax Benefit  

Equity-based awards:

           

Director restricted stock

   $ —        $ —        $ 240      $ 91  

Employee RSUs

     1,042        396        1,187        451  

Liability-based awards:

           

Employee cash SARs

     150        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,192      $ 396      $ 1,427      $ 542  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table identifies stock options, employee stock settled SARs, and employee cash settled SARs exercised during the three and nine months ended September 30, 2017 and 2016:

 

    

Three months ended

September 30, 2017

 
     Number
Exercised
     Weighted
Average
Exercise
Price
     Intrinsic
Value
     Number
of
Shares
Issued
     Net Cash
Payment
to
Employees
 

Stock options

     —          —          —          —          NA  

Employee stock SARs

     77      $ 11.30        —          24        NA  

Employee cash SARs

     —          —          NA        NA        —    
  

 

 

       

 

 

    

 

 

    

 

 

 
     77           —          24        —    
  

 

 

       

 

 

    

 

 

    

 

 

 
    

Nine months ended

September 30, 2017

 
     Number
Exercised
     Weighted
Average
Exercise
Price
     Intrinsic
Value
     Number
of
Shares
Issued
     Net Cash
Payment
to
Employees
 

Stock options

     137,307      $ 14.90      $ 1,396        79,601        NA  

Employee stock SARs

     46,798      $ 15.84        116        10,614        NA  

Employee cash SARs

     28,150      $ 16.47        NA        NA      $ 169  
  

 

 

       

 

 

    

 

 

    

 

 

 
     212,255         $ 1,512        90,215      $ 169  
  

 

 

       

 

 

    

 

 

    

 

 

 
    

Three months ended

September 30, 2016

 
     Number
Exercised
     Weighted
Average
Exercise
Price
     Intrinsic
Value
     Number
of
Shares
Issued
     Net Cash
Payment
to
Employees
 

Stock options

     30,074      $ 16.54      $ 9        9,832        NA  

Employee stock SARs

     41,237      $ 15.83        5        1,768        NA  

Employee cash SARs

     27,521      $ 15.95        NA        NA      $ 45  
  

 

 

       

 

 

    

 

 

    

 

 

 
     98,832         $ 14        11,600      $ 45  
  

 

 

       

 

 

    

 

 

    

 

 

 
    

Nine months ended

September 30, 2016

 
     Number
Exercised
     Weighted
Average
Exercise
Price
     Intrinsic
Value
     Number
of
Shares
Issued
     Net Cash
Payment
to
Employees
 

Stock options

     65,034      $ 13.86      $ 117        44,792        NA  

Employee stock SARs

     79,806      $ 14.54        26        6,634        NA  

Employee cash SARs

     47,644      $ 15.11        NA        NA      $ 73  
  

 

 

       

 

 

    

 

 

    

 

 

 
     192,484           143        51,426        73  
  

 

 

       

 

 

    

 

 

    

 

 

 

 

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Table of Contents

At September 30, 2017, the Company had estimated unrecognized compensation expense of approximately $2,019 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 2.26 years as of September 30, 2017.

NOTE 10 – DERIVATIVE INSTRUMENTS

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 rate risk exposure. As of September 30, 2017 and December 31, 2016, the Bank had non-hedge designated interest rate swaps with an aggregate notional amount of approximately $8,357 and $8,540, 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 September 30, 2017 and December 31, 2016.

Previously, the Bank entered into a swap with a third party to serve as a hedge to a fixed rate loan. This swap was designated a hedging instrument, hedging a 10-year fixed rate note bearing interest at 5.71% and maturing August 2023. As of September 30, 2017 the swap was terminated, resulting in a one-time termination fee of $71 paid by the Company to the third party.

The following tables present quantitative information pertaining to the commercial loan related interest rate swaps as of September 30, 2017 and December 31, 2016:

 

     September 30, 2017     December 31, 2016  
     Not-Hedge-
Designated
    Hedge-
Designated
    Not-Hedge-
Designated
 

Notional amount

   $ 8,357     $ 1,492     $ 8,540  

Weighted average pay rate

     4.58     5.71     4.85

Weighted average receive rate

     4.32     3.54     3.63

Weighted average maturity in years

     4.70       6.65       5.45  

 

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Table of Contents

The following table presents the fair values of derivative instruments and their locations in the consolidated balance sheets as of September 30, 2017 and December 31, 2016:

 

          Asset Derivatives      Liability Derivatives  

Derivative

  

Balance sheet

location

   September 30,
2017
     December 31,
2016
     September 30,
2017
     December 31,
2016
 

Cash flow hedge - trust preferred

   Other assets or other payables    $ —        $ 91      $ —        $ —    

Interest rate swap designated as hedging instrument

   Other assets or other payables      —          45        —          67  

Interest rate swap not designated as hedging instrument

   Other assets or other payables      17        14        17        14  
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 17      $ 150      $ 17      $ 81  
     

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the income statement impact of the derivative instruments for the three and nine months ended September 30, 2017 and 2016:

 

Derivative

  

Income statement

location

   Three months ended
September 30,
    Nine months ended
September 30,
 
      2017      2016     2017      2016  

Interest rate swap designated as hedging instrument

   Other noninterest income    $ —        $ (2   $ 4      $ (6
     

 

 

    

 

 

   

 

 

    

 

 

 
      $ —        $ (2   $ 4      $ (6
     

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

NOTE 11 – 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 following table presents the estimated fair values of the financial instruments at September 30, 2017 and December 31, 2016:

 

     September 30, 2017      December 31, 2016  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

           

Cash and cash equivalents

   $ 70,278      $ 70,278      $ 67,113      $ 67,113  

Securities available-for-sale

     453,660        453,660        470,996        470,996  

Loans, net of deferred fees

     1,882,842        1,855,447        1,857,767        1,837,673  

Accrued interest receivable

     6,502        6,502        7,017        7,017  

Federal Home Loan Bank stock

     7,084        7,084        5,423        5,423  

Bank-owned life insurance

     35,840        35,840        35,165        35,165  

Interest rate swaps

     17        17        150        150  

Financial liabilities:

           

Deposits

   $ 2,098,157        2,097,073      $ 2,148,103      $ 2,147,056  

Federal Home Loan Bank borrowings

     101,000        101,005        65,000        65,043  

Subordinated debenture

     34,167        34,167        34,096        32,140  

Junior subordinated debentures

     11,428        7,610        11,311        6,972  

Accrued interest payable

     672        672        176        176  

Interest rate swaps

     17        17        81        81  

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 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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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.

 

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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 September 30, 2017 and December 31, 2016:

 

     Carrying
Amount
     Fair Value at September 30, 2017  
        Level 1      Level 2      Level 3  

Financial assets:

           

Cash and cash equivalents

   $ 70,278      $ 70,278      $ —        $ —    

Loans, net of deferred fees

     1,882,842        —          —          1,855,447  

Accrued interest receivable

     6,502        6,502        —          —    

Federal Home Loan Bank stock

     7,084        7,084        —          —    

Financial liabilities:

           

Deposits

   $ 2,098,157      $ 1,961,663      $ 135,410      $ —    

Federal Home Loan Bank borrowings

     101,000        —          101,005        —    

Subordinated debentures

     34,167        —          34,167        —    

Junior subordinated debentures

     11,428        —          7,610        —    

Accrued interest payable

     672        672        —          —    
     Carrying
Amount
     Fair Value at December 31, 2016  
        Level 1      Level 2      Level 3  

Financial assets:

           

Cash and cash equivalents

   $ 67,113      $ 67,113      $ —        $ —    

Loans

     1,857,767        —          —          1,837,673  

Accrued interest receivable

     7,017        7,017        —          —    

Federal Home Loan Bank stock

     5,423        5,423        —          —    

Bank-owned life insurance

     35,165        35,165        —          —    

Financial liabilities:

           

Deposits

   $ 2,148,103      $ 1,969,220      $ 177,836      $ —    

Federal Home Loan Bank borrowings

     65,000        —          65,043        —    

Subordinated debentures

     34,096        —          32,140        —    

Junior subordinated debentures

     11,311        —          6,972        —    

Accrued interest payable

     176        176        —          —    

 

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The tables below show assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:

 

     Carrying      Fair Value at September 30, 2017  
     Value      Level 1      Level 2      Level 3  

Financial Assets

           

Available-for-sale securities

           

Obligations of U.S. government agencies

   $ 25,670      $ —        $ 25,670      $ —    

Obligations of states and political subdivisions

     110,474        —          110,474        —    

Agency mortgage-backed securities

     278,865        —          278,865        —    

Private-label mortgage-backed securities

     1,518        —          315        1,203  

SBA variable rate pools

     37,133        —          37,133        —    

Interest rate swaps

     17        17        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured on a recurring basis

   $ 453,677      $ 17      $ 452,457      $ 1,203  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap liabilities measured on a recurring basis

   $ 17      $ 17      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 
     Carrying      Fair Value at December 31, 2016  
     Value      Level 1      Level 2      Level 3  

Available-for-sale securities

           

Obligations of U.S. government agencies

   $ 25,620      $ —        $ 25,620      $ —    

Obligations of states and political subdivisions

     110,739        —          110,739        —    

Agency mortgage-backed securities

     290,036        —          290,036        —    

Private-label mortgage-backed securities

     1,937        —          569        1,368  

SBA variable rate pools

     42,664        —          42,664        —    

Interest rate swaps

     150        150        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured on a recurring basis

   $ 471,146      $ 150      $ 469,628      $ 1,368  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap liabilities measured on a recurring basis

   $ 81      $ 81      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

No transfers to or from Levels 1 and 2 occurred on assets and liabilities measured at fair value on a recurring basis during the three or nine months ended September 30, 2017 or during the year ended December 31, 2016.

 

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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 nine months ended September 30, 2017 and 2016:

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2017      2016      2017      2016  

Beginning balance

   $ 1,267      $ 1,399      $ 1,368      $ 1,586  

Transfers into level 3

     —          70        —          70  

Transfers out of Level 3

     —          —          —          —    

Total gains or losses

           

Included in earnings

     (7      (2      (9      (19

Included in other comprehensive income

     13        64        70        45  

Paydowns

     (70      (77      (226      (228

Purchases, issuances, sales and settlements

           

Purchases

     —          —          —          —    

Issuances

     —          —          —          —    

Sales

     —          —          —          —    

Settlements

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 1,203      $ 1,454      $ 1,203      $ 1,454  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

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

 

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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.

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. Due to the pending merger with Columbia and the anticipated timing of the closing, the independent analysis that would have normally been conducted as of June 30, 2017 was not completed.

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

The tables below show assets measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016:

 

     Carrying      Fair Value  
September 30, 2017    Value      Level 1      Level 2      Level 3  

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

   $ 458      $ —        $ —        $ 458  
     Carrying      Fair Value  
December 31, 2016    Value      Level 1      Level 2      Level 3  

Other real estate owned

   $ 10,936      $ —        $ —        $ 10,936  

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

 

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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.

NOTE 12 – 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 September 30, 2017, the Company and the Bank met all capital adequacy requirements to which they were subject.

As of September 30, 2017, 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.

 

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

As of September 30, 2017:

               

Total capital (to risk weighted assets)

               

Bank:

   $ 291,800        13.41   $ 174,002        8.00   $ 217,502        10.00

Company:

   $ 295,048        13.56     NA          NA     

Tier 1 capital (to risk weighted assets)

               

Bank:

   $ 267,989        12.32   $ 130,501        6.00   $ 174,002        8.00

Company:

   $ 237,069        10.90     NA          NA     

Common Equity Tier 1 (to risk weighted assets)

               

Bank:

   $ 267,989        12.32   $ 97,876        4.50   $ 141,376        6.50

Company:

   $ 223,696        10.28     NA          NA     

Tier 1 capital (to leverage assets)

               

Bank:

   $ 267,989        10.72   $ 100,002        4.00   $ 108,751        5.00

Company:

   $ 237,069        9.48     NA          NA     

As of December 31, 2016:

               

Total capital (to risk weighted assets)

               

Bank:

   $ 267,416        12.19   $ 175,555        8.00   $ 219,444        10.00

Company:

   $ 278,444