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EX-31.2 - PCBK 302 CFO CERTIFICATION - PACIFIC CONTINENTAL CORPpcbkcfocertification.htm
EX-32 - SECTION 1350 CERTIFICATION - PACIFIC CONTINENTAL CORPsection1350certification.htm
EX-31.1 - PCBK 302 CEO CERTIFICATION - PACIFIC CONTINENTAL CORPpcbkceocertification.htm

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, 2011.

[   ]           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) (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 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   XNo   __

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, 2011:                                                                                                   18,427,084

 
 

 

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

 
 
 
 
 
 


 
 

 

                                                                                                                      
Part I                 Financial Information

Pacific Continental Corporation and Subsidiary
(In thousands, except share amounts)
(Unaudited)
 
   
March 31,
   
December 31,
   
March 31,
 
   
2011
   
2010
   
2010
 
ASSETS
                 
Cash and due from banks
  $ 17,333     $ 25,424     $ 18,140  
Interest-bearing deposits with banks
    273       267       264  
Total cash and cash equivalents
    17,606       25,691       18,404  
                         
Securities available-for-sale
    270,792       253,907       178,638  
Loans held-for-sale
    360       2,116       1,219  
Loans, less allowance for loan losses and net deferred fees
    826,466       839,815       911,617  
Interest receivable
    4,458       4,371       4,396  
Federal Home Loan Bank stock
    10,652       10,652       10,652  
Property and equipment, net of accumulated depreciation
    20,597       20,883       20,512  
Goodwill and intangible assets
    22,402       22,458       22,625  
Deferred tax asset
    9,869       10,188       6,385  
Taxes receivable
    -       -       2,339  
Other real estate owned
    13,740       14,293       3,890  
Prepaid FDIC assessment
    3,907       4,387       5,791  
Other assets
    1,686       1,415       1,916  
                         
Total assets
  $ 1,202,535     $ 1,210,176     $ 1,188,384  
                         
LIABILITIES AND SHAREHOLDERS' EQUITY
                       
Deposits
                       
Noninterest-bearing demand
  $ 247,223     $ 234,331     $ 211,846  
Savings and interest-bearing checking
    541,833       574,333       471,358  
Time $100,000 and over
    62,385       63,504       63,554  
Other time
    74,929       86,791       115,342  
Total deposits
    926,370       958,959       862,100  
                         
Federal funds and overnight funds purchased
    -       -       49,810  
Federal Home Loan Bank borrowings
    91,500       67,000       96,500  
Junior subordinated debentures
    8,248       8,248       8,248  
Accrued interest and other payables
    2,667       3,731       3,918  
Total liabilities
    1,028,785       1,037,938       1,020,576  
                         
Shareholders' equity
                       
Common stock, shares authorized:  50,000,000 at March 31, 2011
                       
and December 31, 2010, 25,000,000 at March 31, 2010;
                       
shares issued and outstanding:  18,421,132 at March 31, 2011,
                       
18,415,132 at December 31, 2010 and 18,393,773 at March 31, 2010
    137,221       137,062       136,453  
Retained earnings
    35,234       33,969       30,532  
Accumulated other comprehensive gain
    1,295       1,207       823  
      173,750       172,238       167,808  
                         
Total liabilities and shareholders’ equity
  $ 1,202,535     $ 1,210,176     $ 1,188,384  
                         
 
See accompanying notes.
 
                         


 
3

 

Pacific Continental Corporation and Subsidiary
(In thousands, except share and per share amounts)
(Unaudited)
 
   
Three months ended
 
   
March 31,
 
   
2011
   
2010
 
Interest and dividend income
           
Loans
  $ 12,999     $ 14,664  
Securities
    2,041       1,551  
Federal funds sold & interest-bearing deposits with banks
    2       1  
      15,042       16,216  
                 
Interest expense
               
Deposits
    1,926       2,332  
Federal Home Loan Bank & Federal Reserve borrowings
    492       635  
Junior subordinated debentures
    31       129  
Federal funds purchased
    11       11  
      2,460       3,107  
                 
Net interest income
    12,582       13,109  
                 
Provision for loan losses
    2,150       4,250  
Net interest income after provision for loan losses
    10,432       8,859  
                 
Noninterest income
               
Service charges on deposit accounts
    430       410  
Other fee income, principally bankcard
    387       326  
Loan servicing fees
    28       17  
Mortgage banking income
    42       35  
Loss on sale of investment securities
    (9 )     -  
Other noninterest income
    272       257  
      1,150       1,045  
                 
Noninterest expense
               
Salaries and employee benefits
    4,667       4,788  
Premises and equipment
    858       843  
Bankcard processing
    157       137  
Business development
    382       316  
FDIC insurance assessment
    508       473  
Other real estate expense
    955       88  
Other noninterest expense
    1,818       1,568  
      9,345       8,213  
                 
Income before provision for income taxes
    2,237       1,691  
Provision for income taxes
    788       588  
                 
Net income
  $ 1,449     $ 1,103  
                 
Earnings per share
               
Basic
  $ 0.08     $ 0.06  
Diluted
  $ 0.08     $ 0.06  
                 
Weighted average shares outstanding
               
Basic
    18,415,865       18,393,773  
Common stock equivalents attributable to stock-based awards
    28,539       46,269  
Diluted
    18,444,404       18,440,042  
                 
 
See accompanying notes.
 
                 

 
4

 

Pacific Continental Corporation and Subsidiary
 (In thousands, except share amounts)
(Unaudited)

 
                     
Accumulated
       
                     
Other
       
   
Number
   
Common
   
Retained
   
Comprehensive
       
   
of Shares
   
Stock
   
Earnings
   
Income (Loss)
   
Total
 
                               
Balance, December 31, 2009
    18,393,773     $ 136,316     $ 29,613     $ (267 )   $ 165,662  
                                         
Net income
                    5,092               5,092  
Other comprehensive income:
                                       
Unrealized gain on securities
                            2,615          
less:  realized losses on securities (OTTI)
                            (226 )        
Deferred income taxes
                            (915 )        
                                         
Other comprehensive income
                            1,474       1,474  
                                         
Comprehensive income
                                    6,566  
Stock issuance
    4,952       38                       38  
Stock options exercised and related tax benefit
    16,407       115                       115  
Share-based compensation
            593                       593  
Cash dividends
                    (736 )             (736 )
                                         
Balance, December 31, 2010
    18,415,132       137,062       33,969       1,207       172,238  
                                         
                                         
Net income
                    1,449               1,449  
Other comprehensive income:
                                       
Unrealized gain on securities
                            142          
Deferred income taxes
                            (54 )        
                                         
Other comprehensive income
                            88       88  
                                         
Comprehensive income
                                    1,537  
Stock options exercised and related tax benefit
    6,000       44                       44  
Share-based compensation
            115                       115  
Cash dividends
                    (184 )             (184 )
                                         
Balance, March 31, 2011
    18,421,132     $ 137,221     $ 35,234     $ 1,295     $ 173,750  
                                         
See accompanying notes.
 
                                         

 
5

 

Pacific Continental Corporation and Subsidiary
 (In thousands)
(Unaudited)
 
   
Three months ended
 
   
March 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 1,449     $ 1,103  
Adjustments to reconcile net income to net cash
               
from operating activities:
               
Depreciation and amortization, net of accretion
    1,353       726  
Valuation adjustment on foreclosed assets
    843       -  
Loss (gain) on sale of foreclosed assets
    57       (1 )
Provision for loan losses
    2,150       4,250  
Deferred income taxes
    319       116  
Share-based compensation
    115       137  
Excess tax benefit of stock options exercised
    (6 )     -  
Production of mortgage loans held-for-sale
    (1,890 )     (2,397 )
Proceeds from the sale of mortgage loans held-for-sale
    3,646       1,923  
Change in:
               
Interest receivable
    (87 )     12  
Deferred loan fees
    40       3  
Accrued interest payable and other liabilities
    (1,112 )     (342 )
Income taxes receivable
    -       2,960  
Other assets
    209       451  
Net cash provided by operating activities
    7,086       8,941  
                 
Cash flows from investing activities:
               
Proceeds from maturities and sales of available-for-sale investment securities
    19,372       9,971  
Purchase of available-for-sale investment securities
    (37,054 )     (19,743 )
Net loan principal collections
    10,798       14,976  
Purchase of loans
    -       (40 )
Purchase of property and equipment
    (72 )     (641 )
Proceeds on sale of foreclosed assets
    14       687  
Net cash (used) provided by investing activities
    (6,942 )     5,210  
                 
Cash flows from financing activities:
               
Change in deposits
    (32,589 )     34,182  
Change in federal funds purchased and FHLB short-term borrowings
    30,000       (43,215 )
Proceeds from FHLB term advances originated
    -       2,500  
FHLB advances paid-off
    (5,500 )     (6,000 )
Proceeds from stock options exercised
    38       -  
Income tax benefit from stock options exercised
    6       -  
Dividends paid
    (184 )     (184 )
Net cash used by financing activities
    (8,229 )     (12,717 )
Net increase (decrease) in cash and cash equivalents
    (8,085 )     1,434  
Cash and cash equivalents, beginning of period
    25,691       16,970  
Cash and cash equivalents, end of period
  $ 17,606     $ 18,404  
                 
Supplemental information:
               
Noncash investing and financing activities:
               
Transfers of loans to foreclosed assets
  $ 361     $ 352  
Change in fair value of securities, net of deferred income taxes
  $ 88     $ 1,090  
Cash paid during the period for:
               
Income taxes
  $ -     $ -  
Interest
  $ 2,241     $ 2,552  
                 
See accompanying notes.
 
                 

 
6

 

 Pacific Continental Corporation and Subsidiary
(Unaudited)

A complete set of Notes to Consolidated Financial Statements is a part of the Company’s 2010 Form 10-K filed March 11, 2011.  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 dollar amounts in the following notes are expressed in thousands, except per share amounts or where otherwise indicated.

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

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, 2010, was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2010 Form 10-K.  The interim consolidated financial statements should be read in conjunction with the December 31, 2010, consolidated financial statements, including the notes thereto, included in the Company’s 2010 Form 10-K.


 
7

 

2.      Securities Available-for Sale

The amortized cost and estimated fair values of securities available-for-sale at March 31, 2011, are as follows:
 
March 31, 2011
                                   
(in thousands)
                                   
                           
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 states and political subdivisions:
  $ 21,665     $ -     $ (747 )   $ 20,918     $ 20,918     $ -  
Private-label mortgage-backed securities
    5,240       -       (609 )     4,631       1,627       3,004  
Mortgage-backed securities
    66,724       -       (538 )     66,186       66,186       -  
                                                 
    $ 93,629     $ -     $ (1,894 )   $ 91,735     $ 88,731     $ 3,004  
                                                 
Unrealized Gain Positions
                                               
Obligations of U.S. government agencies
  $ 7,048     $ 177     $ -     $ 7,225                  
Obligations of states and political subdivisions
    13,066       475       -       13,541                  
Private-label mortgage-backed securities
    11,862       455       -       12,317                  
Mortgage-backed securities
    143,089       2,885       -       145,974                  
                                                 
      175,065       3,992       -       179,057                  
                                                 
    $ 268,694     $ 3,992     $ (1,894 )   $ 270,792                  
                                                 

At March 31, 2011, there were 106 investment securities in unrealized loss positions.  The unrealized loss associated with the investments of $3,004 in a continuous unrealized loss position for twelve months or longer was $549.  The projected average life of the securities portfolio is 3.7 years.  The Company has no intent, nor is it more likely than not, that it will be required to sell these securities before the recovery of carrying value.

At March 31, 2011, unrealized losses exist on certain securities classified as obligations of states and political subdivisions, agency and private-label mortgage-backed securities.  The unrealized losses on obligations of states and political subdivisions are deemed to be temporary.  Additionally, the unrealized losses on agency mortgage-backed 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 (“GSEs”).  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 current economic conditions.  Although yields on these securities may be below market rates during the period, no loss of principal is expected.

During the first quarter 2011, management reviewed all of its private-label mortgage-backed securities for the presence of additional other-than-temporary impairment (“OTTI”).  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.  At March 31, 2011, no additional OTTI was identified.  Management has considered all available information related to the collectability of the impaired investment securities and believes that the estimated credit loss is appropriate.


 
8

 

Following is a tabular roll-forward of the amount of credit-related OTTI recognized in earnings during the three months ended March 31, 2011, and 2010:

   
Three months ended
       
   
March 31, 2011
   
March 31, 2010
 
Balance, beginning of period:
  $ 226     $ -  
Additions:
               
Additional OTTI credit loss
    -       -  
Balance, end of period:
  $ 226     $ -  
                 

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

December 31, 2010
                                   
(in thousands)
                                   
                           
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 states and political subdivisions:
  $ 25,236     $ -     $ (1,247 )   $ 23,989     $ 23,989     $ -  
Private-label mortgage-backed securities
    6,318       -       (761 )     5,557       1,137       4,420  
Mortgage-backed securities
    49,830       -       (608 )     49,222       49,222       -  
                                                 
    $ 81,384     $ -     $ (2,616 )   $ 78,768     $ 74,348     $ 4,420  
                                                 
Unrealized Gain Positions
                                               
Obligations of U.S. government agencies
  $ 7,051     $ 211     $ -     $ 7,262                  
Obligations of states and political subdivisions
    7,717       373       -       8,090                  
Private-label mortgage-backed securities
    13,908       596       -       14,504                  
Mortgage-backed securities
    141,891       3,392       -       145,283                  
                                                 
      170,567       4,572       -       175,139                  
                                                 
    $ 251,951     $ 4,572     $ (2,616 )   $ 253,907                  
                                                 

At December 31, 2010, there were 96 investment securities in unrealized loss positions.  The unrealized loss associated with the investments of $4,420 in a continuous unrealized loss position for twelve months or longer was $734.

 
9

 

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

March 31, 2010
                                   
(in thousands)
                                   
                           
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     $ -  
Private-label mortgage-backed securities
    12,287       -       (1,720 )     10,567       6,432       4,135  
Mortgage-backed securities
    27,427       -       (192 )     27,235       27,235       -  
                                                 
    $ 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                  
Private-label mortgage-backed securities
    14,004       389       -       14,393                  
Mortgage-backed securities
    110,410       2,462       -       112,872                  
                                                 
      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 investments of $4,135 in a continuous unrealized loss position for twelve months or longer was $678.

The amortized cost and estimated fair value of securities at March 31, 2011, December 31, 2010, and March 31, 2010, 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, 2011
 
December 31, 2010
 
March 31, 2010
     
Estimated
     
Estimated
     
Estimated
 
Amortized
 
Fair
 
Amortized
 
Fair
 
Amortized
 
Fair
 
Cost
 
Value
 
Cost
 
Value
 
Cost
 
Value
                       
Due in one year or less
 $        19,383
 
 $        19,667
 
 $        14,947
 
 $        15,175
 
 $        31,463
 
 $        31,644
Due after one year through 5 years
         205,135
 
         207,581
 
         181,260
 
         184,338
 
         141,776
 
         143,042
Due after 5 years through 10 years
           37,179
 
           36,775
 
           53,618
 
           52,390
 
             4,065
 
             3,952
Due after 10 years
             6,997
 
             6,769
 
             2,126
 
             2,004
 
                   -
 
                   -
                       
 
 $      268,694
 
 $      270,792
 
 $      251,951
 
 $      253,907
 
 $      177,304
 
 $      178,638
                       

Three investment securities were sold during the first quarter of 2011 resulting in proceeds of $3,179, gross realized gains of $149 and gross realized losses of $158.  The specific identification method was used to determine the cost of the securities sold.  No securities available for sale were sold during the first quarter of 2010.

At March 31, 2011, securities with amortized costs of $18,429 (estimated market values of $19,100) were pledged to secure certain treasury and public deposits as required by law, and to secure borrowing lines.


 
10

 

3.      Loans

Loans are stated at the amount of unpaid principal net of loan premiums or discounts for purchased loans, net 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, including loans held-for-sale, are as follows:

   
March 31,
   
% of gross
   
December 31,
   
% of gross
   
March 31,
   
% of gross
 
   
2011
   
loans
   
2010
   
loans
   
2010
   
loans
 
Real estate secured loans:
                                   
Permanent Loans:
                                   
Multifamily residential
  $ 48,111       5.7 %   $ 57,850       6.8 %   $ 65,995       7.1 %
Residential 1-4 family
    72,926       8.7 %     76,692       8.9 %     86,234       9.3 %
Owner-occupied commercial
    205,701       24.4 %     201,286       23.5 %     200,593       21.6 %
Non-owner-occupied commercial
    157,828       18.7 %     163,071       19.0 %     145,847       15.8 %
Other loans secured by real estate
    21,057       2.6 %     23,950       2.8 %     28,223       3.0 %
Total permanent real estate loans
    505,623       60.0 %     522,849       61.0 %     526,892       56.8 %
Construction Loans:
                                               
Multifamily residential
    1,114       0.0 %     6,192       0.7 %     17,167       1.8 %
Residential 1-4 family
    21,774       2.6 %     22,683       2.6 %     36,174       3.9 %
Commercial real estate
    12,332       1.5 %     11,730       1.4 %     39,480       4.3 %
Commercial bare land and acquisition & development
    25,072       3.0 %     25,587       3.0 %     32,769       3.5 %
Residential bare land and acquisition & development
    14,506       1.7 %     17,263       2.0 %     26,934       2.9 %
Total construction real estate loans
    74,798       8.9 %     83,455       9.7 %     152,524       16.4 %
Total real estate loans
    580,421       68.9 %     606,304       70.7 %     679,416       73.2 %
Commercial loans
    253,810       30.1 %     243,034       28.4 %     235,357       25.4 %
Consumer loans
    5,966       0.7 %     5,900       0.7 %     6,579       0.7 %
Other loans
    2,119       0.3 %     1,730       0.2 %     6,369       0.7 %
Gross loans
    842,316       100.0 %     856,968       100.0 %     927,721       100.0 %
Deferred loan origination fees
    (623 )             (583 )             (1,247 )        
      841,693               856,385               926,474          
Allowance for loan losses
    (15,227 )             (16,570 )             (14,857 )        
Total loans, net of allowance for loan losses and
                                               
net deferred fees
  $ 826,466             $ 839,815             $ 911,617          
                                                 
Real estate loans held for sale
  $ 360             $ 2,116             $ 1,219          
                                                 


At March 31, 2011, outstanding loans to dental professionals totaled $182,258 and represented 21.6% of total outstanding loans compared to dental professional loans of $177,229 or 20.7% at December 31, 2010, and $160,976 or 17.4% at March 31, 2010.  There are no other industry concentrations in excess of 10% of the total loan portfolio.  However, as of March 31, 2011, approximately 68.9% of the Company’s loan portfolio was collateralized by real estate and is, therefore, susceptible to changes in local market conditions.

At March 31, 2011, outstanding residential construction loans totaled $21,774 and represented 2.6% of total outstanding loans.  In addition, at March 31, 2011, unfunded loan commitments for residential construction totaled $8,363.  Outstanding residential construction loans at December 31, 2010, and March 31, 2010, were $22,683 or 2.6% and $36,174 or 3.9% of total outstanding loans, respectively, with unfunded commitments for residential construction totaling $7,740 and $8,460, respectively.  Commercial real estate construction loans were $12,332 or 1.5% of total outstanding loans at March 31, 2011.  This compares to $11,730 or 1.4% and $39,480 or 4.3% at March 31, 2010.

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.


 
11

 

Allowance for loan losses

A summary of activity in the allowance for loan losses is as follows for the three months ended March 31, 2011, and 2010:

   
Three months ended
 
   
March 31,
 
   
2011
   
2010
 
Balance, beginning of period
  $ 16,570     $ 13,367  
Provision charged to income
    2,150       4,250  
Loans charged against allowance
    (3,613 )     (4,911 )
Recoveries credited to allowance
    120       2,151  
Balance, end of period
  $ 15,227     $ 14,857  
                 


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

The Company performs regular credit reviews of the loan portfolio to determine the credit quality and adherence to underwriting standards. When loans are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process. The Company’s internal risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The ten 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 provides a reasonable starting point for analysis, however they do not by themselves form a sufficient basis to determine the appropriate level for the ALLR.  Qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical losses are also considered including but not limited to:

·  
Changes in international, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;
·  
Changes in the nature and volume of the portfolio and in the terms of loans;
·  
Changes in the experience, ability, and depth of lending management and other relevant staff;
·  
Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;
·  
Changes in the quality of the institution’s loan review system;
·  
Changes in the value of underlying collateral for collateral-dependent loans;
·  
The existence and affect 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.


 
12

 

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 non-performing trends;
·  
Evaluation of specific loss estimates for all significant problem loans;
·  
Recovery experience;
·  
Peer comparison loss rates;

There have been no significant changes to the Company’s allowance for loan loss methodology or policies in the periods presented.

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

Allowance for Loan Losses and Recorded Investment in Loans Receivable
 
                                                             
   
For the period ended March 31, 2011
 
   
Commercial and Other
         
Real Estate
         
Construction
   
Consumer
         
Unallocated
         
Total
 
                                                             
Beginning balance(1)
  $ 2,230       #     $ 10,042       #     $ 3,040     $ 64       #     $ 1,194       #     $ 16,570  
Charge-offs
    (629 )             (1,310 )             (1,663 )     (11 )             -       #       (3,613 )
Recoveries
    43               25               51       1               -       #       120  
Provision
    1,573               (171 )             424       12               312       #       2,150  
                                                                                 
Ending balance
    3,217       #       8,586       #       1,852       66       #       1,506       #       15,227  
                                                                                 
Ending allowance: collectively
                                                                               
evaluated for impairment
  $ 2,674       #     $ 8,438       #     $ 1,634     $ 66       #     $ 1,506       #     $ 14,318  
Ending allowance: individually
                                                                               
evaluated for impairment
    543               148               218       -