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EX-3.2 - AMENDMENT TO AMENDED AND RESTATED ARTICLES - PACIFIC CONTINENTAL CORPexhibit3-2.htm
EX-3.1 - SECOND AMENDED AND RESTATED ARTICLES OF INC - PACIFIC CONTINENTAL CORPexhibit3-1.htm
EX-31.2 - 302 CFO CERTIFICAITON - PACIFIC CONTINENTAL CORPcfocertification.htm
EX-31.1 - 302 CEO CERTIFICATION - PACIFIC CONTINENTAL CORPceocertification.htm
EX-32 - SECTION 1350 CERTIFICATION - PACIFIC CONTINENTAL CORPsection1350certification.htm

As Filed with the Securities & Exchange Commission on May 6, 2010.

SECURITIES & EXCHANGE COMMISSION

FORM 10-Q

[ X ]           Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2010.

[   ]           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
(I.R.S. Employer
Incorporation or Organization)
Identification Number)

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

(541) 686-8685
(Registrant’s telephone number)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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, or a smaller reporting company.  See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Act.
(Check one).
Large accelerated filer   __                                                      Accelerated filer   X                                               Non-accelerated filer  __
Smaller Reporting company __

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

Common Stock outstanding as of April 30, 2010:                                                                                                   18,393,773

 
 

 

PACIFIC CONTINENTAL CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS


 
PART I
FINANCIAL INFORMATION
Page
       
 
Item 1.
Financial Statements
 
       
   
       
   
   
 
 
   
       
   
       
   
       
 
Item 2.
       
 
Item 3.
       
 
Item 4.
       
 
PART II
OTHER INFORMATION
 
       
 
Item 1.
Legal Proceedings
none
       
 
Item 1a.
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
none
       
 
Item 3.
Defaults Upon Senior Securities
none
       
 
Item 4.
Removed and Reserved
none
       
 
Item 5.
Other Information                                
none
       
 
Item 6.
       
   


 
 
 

 

Item 1.  Financial Statements

Consolidated Balance Sheets
(In thousands)
(Unaudited)

   
March 31,
   
December 31,
   
March 31,
 
   
2010
   
2009
   
2009
 
ASSETS
                 
  Cash and due from banks
  $ 18,140     $ 16,698     $ 19,573  
  Interest-bearing deposits with banks
    264       272       474  
            Total cash and cash equivalents
    18,404       16,970       20,047  
                         
  Securities available-for-sale
    178,638       167,618       73,272  
  Loans held-for-sale
    1,219       745       352  
  Loans, less allowance for loan losses and net deferred fees
    911,617       930,997       953,438  
  Interest receivable
    4,396       4,408       4,219  
  Federal Home Loan Bank stock
    10,652       10,652       10,652  
  Property, plant and equipment, net of accumulated depreciation
    20,512       20,228       20,582  
  Goodwill and other intangible assets
    22,625       22,681       22,848  
  Deferred tax asset
    6,429       7,177       4,760  
  Taxes receivable
    2,339       5,299       -  
  Other real estate owned
    3,890       4,224       3,618  
  Prepaid FDIC assessment
    5,791       6,242       -  
  Other assets
    1,872       1,872       2,749  
                         
            Total assets
  $ 1,188,384     $ 1,199,113     $ 1,116,537  
                         
LIABILITIES AND SHAREHOLDERS' EQUITY
                       
  Deposits
                       
    Noninterest-bearing demand
  $ 211,846     $ 202,088     $ 177,176  
    Savings and interest-bearing checking
    471,156       475,869       426,065  
    Time $100,000 and over
    64,256       68,031       50,544  
    Other time
    114,842       81,930       80,062  
       Total deposits
    862,100       827,918       733,847  
                         
  Federal funds and overnight funds purchased
    9,810       10,000       25,000  
  Federal Home Loan Bank advances and other borrowings
    136,500       183,025       216,080  
  Junior subordinated debentures
    8,248       8,248       8,248  
  Accrued interest and other payables
    3,918       4,260       5,153  
            Total liabilities
    1,020,576       1,033,451       988,328  
                         
Shareholders' equity
                       
  Common stock, 25,000 shares authorized
                       
     issued & outstanding:  18,394 at March 31, 2010 and
                       
     December 31, 2009, and 12,867 at March 31, 2009
    136,453       136,316       90,195  
  Retained earnings
    30,532       29,613       39,425  
  Accumulated other comprehensive gain (loss)
    823       (267 )     (1,411 )
      167,808       165,662       128,209  
                         
             Total liabilities and shareholders’ equity
  $ 1,188,384     $ 1,199,113     $ 1,116,537  
                         
See accompanying notes.
 
                         


 
Page 3

 

Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
 
   
Three months ended
 
   
March 31,
 
   
2010
   
2009
 
Interest and dividend income
           
  Loans
  $ 14,664     $ 15,321  
  Securities
    1,547       937  
  Federal funds sold & interest-bearing deposits with banks
    1       1  
      16,212       16,259  
                 
Interest expense
               
  Deposits
    2,332       2,291  
  Federal Home Loan Bank & Federal Reserve borrowings
    635       667  
  Junior subordinated debentures
    125       125  
  Federal funds purchased
    11       25  
      3,103       3,108  
                 
     Net interest income
    13,109       13,151  
                 
Provision for loan losses
    4,250       1,500  
     Net interest income after provision for loan losses
    8,859       11,651  
                 
Noninterest income
               
  Service charges on deposit accounts
    421       466  
  Other fee income, principally bankcard
    475       392  
  Loan servicing fees
    17       18  
  Mortgage banking income
    67       92  
  Other noninterest income
    65       53  
      1,045       1,021  
                 
Noninterest expense
               
  Salaries and employee benefits
    4,788       4,871  
  Premises and equipment
    1,036       997  
  Bankcard processing
    137       117  
  Business development
    305       488  
  FDIC insurance assessment
    473       267  
  Other real estate expense
    88       86  
  Other noninterest expense
    1,386       1,224  
      8,213       8,050  
                 
Income before provision for income taxes
    1,691       4,622  
Provision for income taxes
    588       1,675  
                 
     Net income
  $ 1,103     $ 2,947  
                 
Earnings per share
               
   Basic
  $ 0.06     $ 0.23  
   Diluted
  $ 0.06     $ 0.23  
                 
Weighted average shares outstanding
               
     Basic
    18,394       12,812  
                 
     Common stock equivalents
               
        attributable to stock-based awards
    46       45  
     Diluted
    18,440       12,857  
                 
See accompanying notes.
 


 
Page 4

 

Consolidated Statements of Changes in Shareholders’ Equity
 (In thousands)
(Unaudited)

 
                     
Accumulated
       
                     
Other
       
   
Number
   
Common
   
Retained
   
Comprehensive
       
   
of Shares
   
Stock
   
Earnings
   
Loss
   
Total
 
                               
Balance, December 31, 2008
    12,080     $ 80,019     $ 37,764     $ (1,618 )   $ 116,165  
                                         
Net loss
                    (4,879 )             (4,879 )
Other comprehensive income:
                                       
Unrealized gain on securities
                            2,158          
Deferred income taxes
                            (807 )        
                                         
Other comprehensive income
                            1,351       1,351  
                                         
Comprehensive loss
                                    (3,528 )
Stock issuance
    6,270       55,293                       55,293  
Stock options exercised and related tax benefit
    44       440                       440  
Share-based compensation
            564                       564  
Cash dividends
                    (3,272 )             (3,272 )
                                         
Balance, December 31, 2009
    18,394       136,316       29,613       (267 )     165,662  
                                         
                                         
Net income
                    1,103               1,103  
Other comprehensive income:
                                       
Unrealized gain on securities
                            1,766          
Deferred income taxes
                            (676 )        
                                         
Other comprehensive income
                            1,090       1,090  
                                         
Comprehensive income
                                    2,193  
Share-based compensation
            137                       137  
Cash dividends
                    (184 )             (184 )
                                         
Balance, March 31, 2010
    18,394     $ 136,453     $ 30,532     $ 823     $ 167,808  
                                         
 
See accompanying notes.
 


 
Page 5

 

Consolidated Statements of Cash Flows
 (Dollars in thousands)
(Unaudited)


   
Three months ended
March 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income
  $ 1,103     $ 2,947  
Adjustments to reconcile net income to net cash
               
from operating activities:
               
Depreciation and amortization, net of accretion
    726       233  
Loss on sale or write-down of property and equipment
    -       2  
Provision for loan losses
    4,250       1,500  
(Gains) losses on foreclosed assets
    (1 )     35  
Deferred income taxes
    116       199  
Share-based compensation
    137       98  
Production of mortgage loans held-for-sale
    (2,397 )     (3,966 )
Proceeds from the sale of mortgage loans held-for-sale
    1,923       4,023  
Change in:
               
Interest receivable
    12       (198 )
Deferred loan fees
    3       (180 )
Accrued interest payable and other liabilities
    (342 )     (2,098 )
Income taxes receivable
    2,960       1,711  
Other assets
    451       (21 )
Net cash provided by operating activities
    8,941       4,285  
                 
Cash flow from investing activities:
               
Proceeds from maturities of available for sale investment securities
    9,971       5,135  
Purchase of available for sale investment securities
    (19,743 )     (22,928 )
Net loan principal collections (originations)
    14,976       (10,356 )
Purchase of loans
    (40 )     (40 )
Purchase of property
    (641 )     (177 )
Proceeds on sale of foreclosed assets
    687       1,002  
Purchase of energy tax credits
    -       (111 )
Net cash used by investing activities
    5,210       (27,475 )
                 
Cash flow from financing activities:
               
Change in deposits
    34,182       11,410  
Change in federal funds purchased and FHLB  and FRB
               
     short-term borrowings
    (43,215 )     4,080  
Proceeds from FHLB term advances originated
    2,500       270,000  
FHLB term advances paid-off
    (6,000 )     (271,500 )
Proceeds from stock options exercised
    -       402  
Proceeds from stock issuance
    -       9,676  
Dividends paid
    (184 )     (1,286 )
Net cash provided by financing activities
    (12,717 )     22,782  
Net increase (decrease) in cash and cash equivalents
    1,434       (408 )
Cash and cash equivalents, beginning of year
    16,970       20,455  
Cash and cash equivalents, end of year
  $ 18,404     $ 20,047  
                 
Supplemental information:
               
Noncash investing and financing activities:
               
Transfers of loans to foreclosed assets
  $ 352     $ 1,031  
Change in unrealized gain (loss) on securities, net of
               
    deferred income taxes
    1,090       207  
Cash paid during the year for:
               
Income taxes
  $ -     $ 26  
Interest
  $ 2,552     $ 3,079  
                 
See accompanying notes.
 
                 


 
Page 6

 

Notes to Consolidated Financial Statements
(Unaudited)

A complete set of Notes to Consolidated Financial Statements is a part of the Company’s 2009 Form 10-K filed March 16, 2010.  The notes below are included due to material changes in the financial statements or to provide the reader with additional information not otherwise available.  In preparing these financial statements, the Company has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements.  All numbers in the following notes are expressed in thousands, except share and per share data.

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.

 
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 financial statements include all adjustments and normal accruals, which the Company considers necessary for a fair presentation of the results of operations for such interim periods.  In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, as of the date of the balance sheets and income and expenses for the periods.  Actual results could differ from those estimates.

The balance sheet data as of December 31, 2009 was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2009 Form 10-K.  The interim consolidated financial statements should be read in conjunction with the December 31, 2009 consolidated financial statements, including the notes thereto, included in the Company’s 2009 Form 10-K.

2. Stock Option Plans

Pursuant to the approval of the 2006 Stock Option and Equity Compensation Plan (the “2006 SOEC Plan”) at the annual shareholders’ meeting in April 2006, incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units, or stock appreciation rights may be awarded to attract and retain the best available personnel for positions of responsibility with the Company and its subsidiaries.  Upon adoption of the 2006 SOEC Plan, the Company’s 1999 Employees’ Stock Option Plan (“1999 ESOP Plan”) and the Directors’ Stock Option Plan (“1999 DSOP Plan”) were cancelled and no longer available for future grants.  The Company’s shareholders approved an amendment to the 2006 SOEC Plan on April 20, 2009 to increase the number of shares by 500 that may be subject to awards under the plan.  The exercise price for shares of common stock subject to an option under the 2006 SOEC Plan shall not be less than 100% of the fair market value of a share of common stock as of the date of grant of the option; provided, however, that in the case of an incentive stock option granted to an employee who immediately before the grant of such incentive stock option is a shareholder-employee, the incentive stock option exercise price shall be at least 110% of the fair value of the common stock as of the date of grant of the incentive stock option. 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.  For the quarters ended March 31, 2010, and March 31, 2009, the Company issued no incentive stock options.

Pursuant to the Company’s 2006 SOEC Plan, stock appreciation rights (SARs) may be granted to employees.  The stock appreciation rights may be settled in cash only, or a combination of cash and
 
 
 
Page 7

 
 
common stock as determined at the date of issuance.  The Compensation Committee of the Board of Directors determines vesting provisions when awards are granted, and the awards granted generally vest over three or four years and have a maximum life of ten years.  SARs settled in stock are recognized as equity-based awards while SARs settled in cash are recognized on the balance sheet as liability-based awards, both of which are granted at the fair market value of the Company’s common stock at the grant date.  The grant-date fair value of the liability-based awards vesting in the current period, along with the change in fair value of the awards during the period, are recognized as compensation expense and as an adjustment to the recorded liability.  For the quarter ended March 31, 2010, the Company issued 1,000 SARs to be settled in stock, having a fair value of $3.79.  No SARs were issued during the first quarter 2009.

Also, pursuant to the Company’s 2006 SOEC Plan, non-qualified options and restricted stock awards may be granted to directors.  Stock options may be granted at exercise prices of not less than 100% of the fair market value of our common stock at the grant date.  Restricted stock awards may be granted at the fair market value on the date of the grant.  The maximum life of options granted under this plan is ten years from the grant date.  For the quarters ended March 31, 2010 and March 31, 2009, the Company issued no stock options or restricted stock awards to its Directors.

The following tables identify the compensation expenses and tax benefits received by the Company according to the compensation plans and awards described above for the three months ended March 31, 2010 and 2009:
 

   
Three months ended
   
Three months ended
 
   
March 31, 2010
         
March 31, 2009
       
   
Comp. Exp.
   
Tax Benefit
   
Comp. Exp.
   
Tax Benefit
 
1999 ESOP Plan
  $ 1     $ -     $ 3     $ -  
2006 SOEC - ISOs
    61       -       41       -  
2006 SOEC - SARS stock
    68       26       47       18  
2006 SOEC - SARS cash
    162       62       58       22  
2006 SOEC - DSOs
    7       3       7       3  
2006 SOEC - DRSA
    -       -       -       -  
   Total
  $ 299     $ 91     $ 156     $ 43  
                                 

At March 31, 2010, the Company has estimated unrecognized compensation expense of approximately $375, $435 and $384 for unvested stock options, SAR stock awards, and SAR cash awards, respectively.  These amounts are based on forfeiture rates of 20% for all awards granted to employees.  The weighted-average period of time the unrecognized compensation expense will be recognized for the unvested stock options, SAR stock awards and SAR cash awards is approximately 1.33, 1.37 and 1.36 years, respectively.


 
 
Page 8

 

3.  Securities Available-for-Sale:

The amortized cost and estimated fair values of securities available-for-sale at March 31, 2010 are as follows:


                           
Securities in
   
Securities in
 
                           
Continuous
   
Continuous
 
                           
Unrealized
   
Unrealized
 
                           
Loss
   
Loss
 
         
Gross
   
Gross
   
Estimated
   
Position for
   
Position For
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
Less Than
   
12 Months
 
   
Cost
   
Gains
   
Losses
   
Value
   
12 Months
   
or Longer
 
                                     
Unrealized Loss Positions
                                   
                                     
Obligations of U.S. Government agencies
  $ 5,045     $ -     $ (43 )   $ 5,002     $ 5,002     $ -  
        Mortgage-backed securities
    39,714       -       (1,912 )     37,802       33,667       4,135  
                                                 
    $ 44,759     $ -     $ (1,955 )   $ 42,804     $ 38,669     $ 4,135  
                                                 
Unrealized Gain Positions
                                               
                                                 
 
                                               
 Obligations of U.S.Government agencies
  $ 2,015     $ 9     $ -     $ 2,024                  
Obligations of states and political subdivisions
    6,116       429       -       6,545                  
        Mortgage-backed securities
    124,414       2,851       -       127,265                  
                                                 
      132,545       3,289       -       135,834                  
                                                 
    $ 177,304     $ 3,289     $ (1,955 )   $ 178,638                  
                                                 

At March 31, 2010, there were 44 investment securities in unrealized loss positions.  The unrealized loss associated with the $4,135 in a continuous unrealized loss position for twelve months or longer was $678 at March 31, 2010.  In the opinion of management, these securities are considered only temporarily impaired as the Company has no intent, nor is it more likely than not, that it will be required to sell its impaired securities before their recovery.  The impairment is due to 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 current economic conditions.  The projected average life of the securities portfolio is approximately three years.  Although yields on these securities may be below market rates during that period, no loss of principal is expected.

The amortized cost and estimated fair values of securities available-for-sale at March 31, 2009 are as follows:


         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
                         
                         
Obligations of U.S Government agencies
  $ 1,998     $ 16     $ -     $ 2,014  
Obligation of states and political subdivisions
    6,923       228       (4 )     7,147  
Mortgage-backed securities
    66,561       865       (3,315 )     64,111  
                                 
    $ 75,482     $ 1,109     $ (3,319 )   $ 73,272  
                                 


 
Page 9

 

The amortized cost and estimated fair value of securities at March 31, 2010 and 2009 by maturity are shown below.  Obligations of U.S. Government  agencies and states and political subdivisions are shown by contractual maturity.  Mortgage-backed securities are shown by projected average life.

 
   
March 31, 2010
   
March 31, 2009
 
         
Estimated
         
Estimated
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
 
                         
Due in one year or less
  $ 31,463     $ 31,644     $ 19,871     $ 20,066  
Due after one year through 5 years
    141,776       143,042       45,230       43,294  
Due after 5 years through 10 years
    4,065       3,952       10,381       9,912  
                                 
    $ 177,304     $ 178,638     $ 75,482     $ 73,272  
                                 
                                 
 

No securities available for sale were sold in the first quarter of 2010 or 2009.
 
At March 31, 2010, securities with amortized costs of $32,953 (estimated market values of $32,905) were pledged to secure certain Treasury and public deposits as required by law, and to secure a borrowing line with the Federal Home Loan Bank of Seattle.

 
 
Page 10

 


4. Loans

Major classifications of period end loans are as follows:


   
March 31,
   
% of gross
   
December 31,
   
% of gross
   
March 31,
   
% of gross
 
   
2010
   
loans
   
2009
   
loans
   
2009
   
loans
 
LOANS BY TYPE
                                   
 Real estate secured loans:
                                   
  Permanent Loans:
                                   
   Multifamily residential
  $ 65,995       7.1 %   $ 68,509       7.2 %   $ 66,683       6.9 %
   Residential 1-4 family
    86,234       9.3 %     86,795       9.2 %     79,543       8.2 %
   Owner-occupied commercial
    200,593       21.6 %     197,884       20.9 %     196,875       20.4 %
   Non-owner-occupied commercial
    145,847       15.7 %     147,605       15.6 %     132,691       13.8 %
   Other loans secured by real estate
    28,223       3.1 %     37,404       4.0 %     19,558       2.0 %
    Total permanent real estate loans
    526,892       56.8 %     538,197       56.9 %     495,350       51.3 %
 Construction Loans:
                                               
  Multifamily residential
    17,167       1.8 %     18,472       2.0 %     25,641       2.6 %
  Residential 1-4 family
    36,174       3.9 %     41,714       4.4 %     66,047       6.8 %
  Commercial real estate
    39,480       4.3 %     38,921       4.1 %     59,700       6.2 %
  Commercial bare land and acquisition & development
    32,769       3.5 %     31,751       3.4 %     45,185       4.7 %
  Residential bare land and acquisition & development
    26,934       2.9 %     30,484       3.2 %     33,831       3.5 %
   Total construction real estate loans
    152,524       16.4 %     161,342       17.1 %     230,404       23.8 %
    Total real estate loans
    679,416       73.2 %     699,539       74.0 %     725,754       75.1 %
  Commercial loans
    235,357       25.4 %     233,821       24.7 %     226,738       23.5 %
  Consumer loans
    6,579       0.7 %     6,763       0.7 %     7,595       0.8 %
  Other loans
    6,369       0.7 %     5,629       0.6 %     6,100       0.6 %
Gross loans
    927,721       100.0 %     945,752       100.0 %     966,187       100.0 %
Deferred loan origination fees
    (1,247 )             (1,388 )             (1,551 )        
      926,474               944,364               964,636          
Allowance for loan losses
    (14,857 )             (13,367 )             (11,198 )        
Loans, less allowance for loan losses and net deferred fees
  $ 911,617             $ 930,997             $ 953,438          
                                                 
Real estate loans held for sale
  $ 1,219             $ 745             $ 352          

 
Outstanding loans to dental professionals totaled $160,976 and represented 17.4% of total outstanding loans at March 31, 2010.  There are no other industry concentrations in excess of 10% of total outstanding loans.
At March 31, 2010, outstanding residential construction loans totaled $36,174 and represented 3.9% of total outstanding loans.  In addition, at March 31, 2010, unfunded loan commitments for residential construction totaled $8,460.  Outstanding residential construction loans at December 31, 2009 and March 31, 2009 were $41,714 or 4.4% and $66,047 or 6.8%, respectively, of total outstanding loans, and unfunded commitments for residential construction totaled $9,990 and $14,307, respectively.

Approximately 73% of the Bank’s loans are secured by real estate.  Management believes the granular nature of the portfolio, from industry mix, geographic location and loan size, mitigates risk concentration to some degree.

  
 
Page 11

 

Allowance for loan losses

Below is a summary of additions, charge-offs and recoveries within the allowance for loan losses for the three month periods ending March 31, 2010 and 2009:

   
2010
   
2009
 
             
Balance, January 1
  $ 13,367     $ 10,980  
Provision charged to income
    4,250       1,500  
Loans charged against allowance
    (4,911 )     (1,320 )
Recoveries credited to allowance
    2,151       38  
                 
Balance, March 31
  $ 14,857     $ 11,198  
                 

 
The recorded investment in impaired loans, net of government guarantees, totaled $50,598 and $12,573 at March 31, 2010 and 2009, respectively.  The specific valuation allowance for impaired loans was $1,089 and $764 at March 31, 2010 and 2009, respectively, and is included in the ending allowance shown above.  The average recorded investment in impaired loans was approximately $39,258 and $11,030 during the first three months of 2010 and 2009, respectively.  Interest income recognized on impaired loans was $102 in the first three months of 2010 and $58 in the first quarter of 2009.

5.  Federal Funds and Overnight Funds Purchased:

The Bank has unsecured federal funds borrowing lines with various correspondent banks totaling $88,000.  Below is a summary of the outstanding balances on these lines as of March 31, 2010 and 2009:


March 31, 2010
 
Maximum Line Amount
   
Balance Outstanding
 
Due Date
 
Weighted Average Interest Rate
 
                     
Bank of America
  $ 15,000     $ 9,000  
4/1/2010
    0.45 %
US Bank
    30,000       -            
Key Bank
    -       -            
Zions Bank
    20,000       810  
4/1/2010
    0.65 %
FTN
    18,000       -            
Wells Fargo
    5,000       -            
                           
Total
  $ 88,000     $ 9,810            
                           


March 31, 2009
 
Maximum Line Amount
   
Balance Outstanding
   
Due Date
   
Weighted Average Interest Rate
 
                         
Bank of America
  $ 25,000     $ 25,000    
4/1/2009
      0.45 %
US Bank
    25,000       -       -       -  
Key Bank
    25,000       -       -       -  
Zions Bank
    20,000       -       -       -  
FTN
    18,000       -       -       -  
Wells Fargo
    5,000       -       -       -  
                                 
Total
  $ 118,000     $ 25,000                  
                                 

 
The Bank also has a secured overnight borrowing line available from the Federal Reserve Bank totaling $120,725 at March 31, 2010.  The Federal Reserve Bank borrowing line is secured through the pledging of approximately $201,204 of commercial loans under the Bank’s Borrower-In-Custody program.  At March 31, 2010 the outstanding balance was $40,000, which consisted of one advance that matured on April 8,
 
 
 
Page 12

 
 
2010 and carried an interest rate of 0.50%.   As of March 31, 2009, $40,080 was borrowed on the Federal Reserve line.

6.  Federal Home Loan Bank Borrowings:

The Bank has a borrowing limit with the FHLB equal to 30% of total assets, subject to discounted collateral and stock holdings.  At March 31, 2010, the borrowing line was approximately $357,368.  FHLB stock, funds on deposit with FHLB, securities and loans are pledged as collateral for borrowings from FHLB.  At March 31, 2010, the Bank had pledged approximately $352,357 in real estate loans and securities to the FHLB ($239,184 in discounted pledged collateral).  At March 31, 2010, there was $96,500 borrowed on this line, including $25,000 in short term advances and $71,500 in term advances.

Federal Home Loan Bank borrowings by year of maturity and applicable interest rate are summarized as follows as of March 31:

         
March 31,
 
   
Rate
   
2010
   
2009
 
                   
Cash Management Advance
    0.80 %   $ -     $ 43,000  
2009
    0.65 - 4.04 %     -       95,000  
2010
    0.40 - 4.96 %     33,000       11,500  
2011
    2.39 - 5.28 %     10,000       10,000  
2012
    2.02 - 5.28 %     16,000       5,500  
2013
    2.46 - 4.27 %     22,000       8,000  
2014
    2.78 - 3.25 %     13,500       1,000  
2016
    5.05 %     2,000       2,000  
                         
            $ 96,500     $ 176,000  
                         
                         

 
7.  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 and Tier I capital to risk-weighted assets and of Tier I capital to leverage assets.  Management believes, as of March 31, 2010, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of March 31, 2010 and according to FDIC guidelines, the Company and the Bank are considered to be well capitalized.  To be categorized as well capitalized, the Bank must maintain minimum Total risk-based,

 
 
Page 13

 

Tier I risk-based, and Tier I leverage ratios as set forth in the following table.  The Bank’s and the Company’s actual capital amounts and ratios are presented below:

 
                           
To Be Well
 
                           
Capitalized Under
 
               
For Capital
   
Prompt Corrective
 
   
Actual
   
Adequacy Purposes
   
Action Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
                                     
As of March 31, 2010:
                                   
Total capital (to risk
                                   
weighted assets)
                                   
Bank:
  $ 154,900       15.22 %   $ 81,419       8 %   $ 101,774       10 %
Company:
  $ 165,100       16.22 %   $ 81,430       8 %   $ 101,788       10 %
Tier I capital (to risk
                                               
weighted assets)
                                               
Bank:
    142,153       13.97 %   $ 40,702       4 %   $ 61,054       6 %
Company:
    152,359       14.97 %   $ 40,710       4 %   $ 61,066       6 %
Tier I capital (to leverage
                                               
assets)
                                               
Bank:
    142,153       12.17 %   $ 46,722       4 %   $ 58,403       5 %
Company:
    152,359       13.03 %   $ 46,772       4 %   $ 58,465       5 %
                                                 
                                                 
As of March 31, 2009:
                                               
Total capital (to risk
                                               
weighted assets)
                                               
Bank:
  $ 125,835       12.24 %   $ 82,248       8 %   $ 102,810       10 %
Company:
  $ 126,165       12.27 %   $ 82,259       8 %   $ 102,824       10 %
Tier I capital (to risk
                                               
weighted assets)
                                               
Bank:
    114,441       11.13 %     41,124       4 %     61,686       6 %
Company:
    114,771       10.69 %     42,945       4 %     64,418       6 %
Tier I capital (to leverage
                                               
assets)
                                               
Bank:
    114,441       10.65 %     42,994       4 %     53,742       5 %
Company:
    114,771       10.69 %     42,945       4 %     53,681       5 %

8. Fair Value

Effective for the period ended June 30, 2009, the Company adopted FASB Accounting Standards Codification (ASC) 825-10-65-1, “Interim Disclosures about Fair Value of 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.


 
 
Page 14

 

The table below shows the estimated fair values of financial instruments at March 31, 2010 and December 31, 2009:


   
March 31, 2010
   
December 31, 2009
 
   
Carrying
         
Carrying
       
   
Amount
   
Fair Value
   
Amount
   
Fair Value
 
Financial assets:
                       
  Cash and cash equivalents
  $ 18,140     $ 18,140     $ 16,970     $ 16,970  
  Securities available for sale
    178,638       178,638       167,618       167,618  
  Loans held-for-sale
    1,219       1,219       745       745  
  Loans
    927,721       914,234       945,752       932,608  
  Federal Home Loan Bank stock
    10,652       10,652       10,652       10,652  
  Accrued interest receivable
    4,396       4,396       4,408       4,408  
                                 
Financial liabilities:
                               
  Deposits
    862,100       864,175       827,918       829,893  
  Federal funds and overnight funds purchased
    9,810       9,810       63,025       63,025  
  Federal Home Loan Bank advances and
                               
     other borrowings
    136,500       138,112       130,000       130,787  
  Junior subordinated debentures
    8,248       7,987       8,248       7,987  
  Accrued interest payable