UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2014
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-29829
PACIFIC FINANCIAL CORPORATION
(Exact name of registrant as specified in
its charter)
| Washington |
91-1815009 |
| (State or other jurisdiction of |
(I.R.S. Employer |
| incorporation or organization) |
Identification No.) |
1101 S. Boone Street
Aberdeen, Washington 98520-5244
(Address of principal executive offices)
(Zip Code)
(360) 533-8870
(Registrant's telephone number, including
area code)
Indicate by check mark whether the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No
x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No
x
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 periods that the Registrant was required to file such reports), and (2) has been subject to such
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 x No ¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. Yes ¨ No x
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 definitions of
“large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated
filer ¨ Accelerated filer ¨ Non-accelerated
filer ¨ Smaller Reporting Company x
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No
x
The aggregate market value of the common stock held by non-affiliates
of the registrant at June 30, 2014, was $55,342,407.
The number of shares outstanding of the registrant's common
stock, $1.00 par value as of February 28, 2015, was 10,375,460 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement filed in connection
with its annual meeting of shareholders to be held April 29, 2015 are incorporated by reference into Part III of this Form 10-K.
Form 10-K
Table of
Contents
PART I.
ITEM 1. Business
Pacific Financial Corporation (the “Company”
or “Pacific”) is a bank holding company headquartered in Aberdeen, Washington. The Company owns one bank, Bank of the
Pacific (the “Bank”), which operates in western Washington and the north coast of Oregon. The Company was incorporated
in the State of Washington in February, 1997, pursuant to a holding company reorganization of the Bank.
The Company conducts its banking business
through the Bank, which operates 17 branches located in communities in Grays Harbor, Pacific, Clark, Whatcom, Skagit and Wahkiakum
counties in the state of Washington and three in Clatsop County, Oregon. In addition, the Bank operates loan production offices
in Burlington and DuPont, Washington and, opened in January 2015, Salem, Oregon. The Company also has a residential real estate
mortgage department.
The Company's common stock is listed on
the OTCQB® exchange under the symbol PFLC. Revenue, net income and total assets for the Company for the years ended December 31,
2014, 2013, and 2012 are presented below:
PACIFIC FINANCIAL CORPORATION
(Dollars in Thousands)
| | |
For Year Ended | |
| | |
December 31, | | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | | |
2012 | |
| Revenue: | |
| | | |
| | | |
| | |
| Net interest income | |
$ | 27,033 | | |
$ | 23,800 | | |
$ | 24,011 | |
| Non-interest income | |
| 8,079 | | |
| 9,955 | | |
| 9,391 | |
| Total revenue | |
| 35,112 | | |
| 33,755 | | |
| 33,402 | |
| Net income | |
$ | 4,927 | | |
$ | 3,731 | | |
$ | 4,785 | |
| Total assets | |
$ | 744,807 | | |
$ | 705,039 | | |
$ | 643,594 | |
For additional selected financial information,
please see “Item 6. Selected Financial Data” below.
The Company is presently a reporting company
with the Securities and Exchange Commission (“SEC”). Pacific's filings with the SEC, including its annual report on
Form 10-K, quarterly reports on Form 10-Q, periodic current reports on Form 8-K and amendments to these reports, are available
free of charge through links from our website at http://www.bankofthepacific.com to the SEC's site at http://www.sec.gov,
as soon as reasonably practicable after filing with the SEC. You may also access our filings with the SEC directly from the EDGAR
database found on the SEC's website. By making reference to our website above and elsewhere in this report, we do not intend to
incorporate any information from our site into this report. The Company intends to terminate its registration with the SEC under
the Securities Exchange Act of 1934 during second quarter 2015, terminating its reporting obligations with the SEC.
The Bank
Bank of the Pacific was organized in 1978
and opened for business in 1979 to meet the need for a regional community bank with local interests to serve the small to medium-sized
businesses and professionals in the coastal region of western Washington. The Bank initially focused on coastal communities in
western Washington, but it has expanded into the Bellingham, Washington area and, more recently, communities along the northern
Oregon coast, Vancouver, Washington and Salem, Oregon. Products and services offered by the Bank include personal and business
deposit products and services and various loan and credit products as described in greater detail below.
Deposit Products and Services
The Bank's primary sources of deposits
are individuals and businesses in its local markets. Bank management has made a concerted effort to attract deposits in our local
market areas through competitive pricing and delivery of quality products. The Bank offers a traditional array of deposit products,
including non-interest bearing checking accounts, interest-bearing checking and savings accounts, money market accounts, and certificates
of deposits. These accounts earn interest at rates established by management based on competitive market factors and management’s
strategic objectives in regards to the types or maturities of deposit liabilities from time to time. Services which accompany the
deposit products include sweep accounts, wire services, safety deposit boxes, online banking, mobile banking, and cash management
and other treasury management services.
The Bank's deposits are insured by the
Federal Deposit Insurance Corporation (“FDIC”) up to applicable legal limits under the Deposit Insurance Fund. The
Bank is a member of the Federal Home Loan Bank (“FHLB”) and is regulated by the Washington Department of Financial
Institutions, Division of Banks (“Washington Division”), and the FDIC.
The Bank provides 24-hour online and mobile
banking to its customers with access to account balances and transaction histories, plus an electronic check register to make account
management and reconciliation easier. The online banking system is compatible with budgeting software like Intuit's Quicken®
or Microsoft's Money®. In addition, the online and mobile banking systems include the ability to transfer funds, make loan
payments, reorder checks, and request statement reprints, provide loan calculators and allows for e-mail exchanges with representatives
of the Bank. Also, for a nominal fee, customers can request stop payments and pay an unlimited number of bills online. Through
mobile banking, customers can deposit checks and conduct certain banking activities via text message. These services, along with
rate and other information, can be accessed through the Bank's website at http://www.bankofthepacific.com.
In addition to providing accounts and services
to local customers, the Bank utilizes brokered deposits from time to time, which are deposits that are acquired from outside the
region. The Bank also participates in the Certificate of Deposit Account Registry Service (“CDARS”) which uses a deposit-matching
program to distribute deposit balances in excess of insurance or other limits across participating banks. Our participation in
CDARS is intended to enhance our ability to attract and retain customers and increase deposits by providing additional FDIC coverage
to customers. Due to the nature of the placement of the funds, CDARS deposits are classified as “brokered deposits”
by regulatory agencies. In determining whether to take brokered deposits, the Bank considers current market interest rates, profitability
to the Bank, and matching deposits and loan products.
The Company is not dependent on any significant
individual customers, entities or group of related entities for deposits. There are no deposit relationships exceeding two percent
of total deposits.
Lending Activities
General. Lending products offered
by the Bank include real estate loans, commercial loans, agriculture loans, consumer loans, and residential mortgage loans. The
majority of the Company’s loan portfolio is comprised of real estate loans, which include commercial real estate, residential
construction, land development and other land loans. See "Footnote 4 – Loans" in the audited consolidated financial
statements included under Item 15 of this report for balances in each of our lending categories as of December 31, 2014 and 2013.
The Bank originates loans primarily in
its local markets. Loans to borrowers outside of Washington and Oregon total $85.1 million, or 15.1%, of total loans at December
31, 2014. Of this amount, $32.8 million, or 5.8% of total loans, are government guaranteed loans purchased in the secondary market
that were not originated by us. Additionally, our loan portfolio includes $687,000 in loans purchased from and originated by other
financial institutions, representing 0.1% of total loans.
Underwriting and Credit Administration.
The Bank's lending activities are guided by policies that are reviewed and approved annually by our board of directors. These policies
address the types of loans, underwriting standards, structure and pricing considerations, and compliance with laws, regulations
and internal lending limits. As part of our credit administration process, we routinely engage external loan specialists to perform
asset quality reviews. These reviews consist of sampling loans to review individual borrower loan files for adherence to policy
and underwriting standards, proper loan administration, and asset quality. In addition, the management executive committee and
credit administration staff meet quarterly with loan personnel to review loan risk assessments on loans greater than $500,000 with
an internal risk rating of watch or worse. See the subheading “Classification of Loans” in this section below.
Our loan policy also establishes loan approval
authorities for certain officers individually. Loan officer lending authority ranges from $5,000 to $500,000 on a Total Family
Debt basis (“TFD”). Commercial Banking Team Leaders have approval authorities up to $1,000,000 TFD. Credit
Risk Officers approve loans up to $3,500,000 TFD. The Chief Credit Officer approves loans up to $4,500,000 TFD. The
Management Loan Committee (“MLC”) approves loans greater than $4,500,000 TFD. The MLC is chaired by the Chief
Credit Officer. Other members include the bank’s two Credit Risk Officers, the Commercial Banking Manager and a Commercial
Banking Team Leader. Additionally, loans with a risk rating of substandard or doubtful, with balances of $2,000,000 or more,
must also be approved by the MLC. The Board Loan Committee (“BLC”) meets at least quarterly to review the allowance
for loan losses, summary of loans reviewed by the MLC, loan policy exceptions, concentration reports, key credit metrics and any
loan losses. The Bank’s legal lending limit was $17.0 million at December
31, 2014, however it maintains an internal lending limit of $8.5 million. This represents the maximum lending limit to individual
borrowers and related entities, exceptions from which are made judiciously. The Bank does not have significant loan concentrations
to any individual customer, entity or group of related entities.
The Bank's underwriting policies focus
on assessment of each borrower's ability to service and repay the debt, and the availability of collateral to secure the loan.
Depending on the nature of the borrower and the purpose and amount of the loan, the Bank's loans may be secured by a variety of
collateral, including real estate, business assets, and personal assets. The value of our collateral is subject to change. See
the discussion under the subheading "Lending Activities—Classification of Loans" for additional information regarding
our periodic evaluation of collateral values. Analysis of whether to make a loan to a particular borrower requires consideration
of (1) the borrower’s character, (2) the borrower’s financial condition as reflected in current financial statements,
(3) the borrower’s management capability, (4) the borrower’s industry, and (5) the economic environment in which the
loan will be repaid. Before closing a loan, the Bank’s loan documentation files will include financial statements of the
borrower, guarantors, endorsers and co-makers. We seek income verification on loans other than homogenous non-real estate consumer
loans. Tax returns are considered an excellent source of financial information. Applicable credit reports (Dunn & Bradstreet,
Equifax or credit bureau reports) are also required on all loans. Financial statements reviewed by third party accountants are
required for commercial loans between $3 million and $5 million. Audited financial statements are required on commercial credits
of $5 million or more. In addition, in instances where a borrower or guarantor maintains liquidity that is a material factor in
loan approval, verification of that liquidity is sought.
The Bank generally requires guarantor support
on commercial real estate loans, commercial and industrial loans to entities, where applicable, and certain consumer loans. Loans
to closely held corporations will normally be guaranteed by the major stockholders. On occasion, we may choose to make exceptions
to this policy for long-standing customers and others, which must be approved by credit administration. In addition, as a policy,
loans that are to legal entities formed for the limited purpose of the business or project being financed require personal guarantees
in support of the loan. Similarly, the Bank's policy is not to engage in non-recourse financing on commercial and commercial real
estate loans. Before extending credit to a business, the Bank looks closely at its evaluation of the borrower’s management
ability, financial history, including cash flow of the borrower and all guarantors (referred to as “global cash flow”
in our industry), and the liquidation value of the collateral.
The Company's loan portfolio does not include
permanent residential mortgage loans originated as subprime loans, “Alt-A” loans, or no documentation, interest only
or option adjustable rate loans.
Commercial Lending. The Bank's commercial
and agricultural loans consist primarily of secured revolving operating lines of credit, equipment financing, accounts receivable
and inventory financing and business term loans, some of which may be partially guaranteed by the Small Business Administration
or the U.S. Department of Agriculture. The Company’s credit policies determine advance rates against the different forms
of collateral that can be pledged against commercial loans. Typically, the majority of loans will be limited to a percentage of
the underlying collateral values such as equipment, eligible accounts receivable and finished inventory. Individual advance rates
may be higher or lower depending upon the financial strength of the borrower, quality of the collateral and/or term of the loan.
Commercial Real Estate. The Bank
originates owner occupied and non-owner occupied commercial real estate and multifamily loans within its primary market areas.
Underwriting standards require that commercial and multifamily real estate loans not exceed 65-80% of the lower of appraised value
at origination or cost of the underlying collateral, depending upon specific property type. The cash flow coverage to debt servicing
requirement is generally that annual cash flow be a minimum of between 1.25-1.35 times debt service for commercial real estate
loans and 1.25 times debt service for multifamily loans. Cash flow coverage is calculated using a market interest rate.
Commercial real estate and multifamily
loans typically involve a greater degree of risk than single-family residential mortgage loans. Payments on loans secured by multifamily
and commercial real estate properties are dependent on successful operation and management of the properties and repayment of these
loans is affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by scrutinizing
the financial condition of the borrower, the quality and value of the collateral, and the management of the property securing the
loan. In addition, the Bank reviews the commercial real estate loan portfolio annually to evaluate the performance of individual
loans greater than $500,000 and for potential changes in interest rates, occupancy, and collateral values.
Non-owner occupied commercial real estate
loans are loans in which less than 50% of the property is occupied by the owner and include loans such as apartment complexes,
hotels and motels, retail centers and mini-storage facilities. Repayment of non-owner occupied commercial real estate loans is
dependent upon the lease or resale of the subject property. Loan amortizations range from 10 to 30 years, although terms typically
do not exceed 10 years. Interest rates can be either floating or fixed. Floating rates are typically indexed to the prime rate
or Federal Home Loan Bank advance rates plus a defined margin. Fixed rates are generally set for periods of three to five years
with either a rate reset provision or a payment due at maturity. Prepayment penalties are often sought on term commercial real
estate loans. The penalties are designed to protect the Bank from refinancing of the loan during the early years of the transaction.
Construction Loans. The
Bank originates single-family residential construction loans for custom homes where the home buyer is the borrower. It has also
provided financing to builders for the construction of pre-sold homes and, in selected cases, to builders for the construction
of speculative residential property. The Bank endeavors to limit construction lending risks through adherence to specific underwriting
guidelines and procedures. Repayment of construction loans is dependent upon the sale of individual homes to consumers or in some
cases to other developers. Construction loans are generally short-term in nature and most loans mature in one to three years. Interest
rates are usually floating and fully indexed to a short-term rate index. The Bank's credit policies address maximum loan to value,
cash equity requirements, inspection requirements, and overall credit strength.
Single-Family Residential Real Estate
Lending. The majority of our one-to-four family residential loans are secured by single-family residences
located in our primary market areas. Single-family portfolio loans are generally owner-occupied and our underwriting standards
require that loan amounts not exceed 80% of the lower of appraised value at origination or cost of the underlying collateral. Terms
typically range from 15 to 30 years. Repayment of these loans comes from the borrower’s personal cash flows and liquidity,
and collateral values are a function of residential real estate values in the markets we serve. These loans include primary residences,
second homes, rental homes and home equity loans and home equity lines of credit.
Origination and Sales of Residential
Mortgage Loans. The Bank also originates mortgage loans for sale into the secondary market. Commitments to sell mortgage loans
are generally made during the period between the loan application and the closing of the mortgage loan. Most of these sale commitments
are made on a “best efforts” basis whereby the Bank is only obligated to sell the mortgage if the mortgage loan is
approved and closed. As a result, management believes that market risk is minimal. When we sell mortgage loans, we sell the rights
to service the loans as well (i.e., collection of principal and interest payments). Mortgage loans originated for sale are underwritten
in accordance with standards of the loan purchaser, as a result, underwriting standards vary.
Consumer. Consumer loans and other
loans represent a small percentage of total outstanding loans and include new and used auto loans, boat loans, and personal lines
of credit.
Classification of Loans. Federal
regulations require that the Bank periodically evaluate the risks inherent in its loan portfolios. In addition, the Washington
Division and the FDIC have authority to identify classified or problem loans and, if appropriate, require them to be reclassified.
There are three classifications for classified loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined
weaknesses and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected.
Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses
make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions,
and values. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible
and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof
is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses,
thereby reducing that reserve. The Bank also classifies loans as Pass or Other Loans Especially Mentioned (“OLEM”).
Pass grade loans include a range of loans from very high credit quality to acceptable credit quality. These borrowers generally
have strong to acceptable capital levels and consistent earnings and debt service capacity; however within the Pass classification
certain loans are Watch rated because they have elements of risk that require more monitoring than other performing loans. Some
loans within the Pass category are to borrowers who are experiencing unusual operating difficulties, but have acceptable payment
performance to date. Overall, loans with a Pass grade show no immediate loss exposure. Loans classified as OLEM are assets that
continue to perform but have shown deterioration in credit quality and require closer monitoring.
On an ongoing basis, the Bank reviews borrower
financial results, collateral values, and compliance with payment terms and covenant requirements in order to identify problems
in loan relationships. When management believes that the collection of all or a portion of principal and interest is no longer
probable, the loan is placed on “non-accrual” status, accrual of interest is suspended, previously accrued interest
is reversed, and interest payments are applied to principal until the Company determines that all remaining principal and interest
can be recovered. This may occur at any time regardless of delinquency, however it is the policy of the Bank that a loan past due
90 days or more and not in the process of collection be placed on non-accrual status. Interest income is subsequently recognized
only to the extent that cash payments are received until, in management’s judgment, the borrower has the ability to make
contractual interest and principal payments, in which case the loan is returned to accrual status. When all or a portion of the
contractual cash flows are not expected to be collected, the loan is considered impaired. Impairment is measured on a loan by loan
basis for commercial, construction and real estate loans by either the present value of the expected future cash flows discounted
at the loan’s effective interest rate, or the fair value of the collateral less estimated selling costs if the loan is collateral
dependent. The Company estimates and records impairment based on the estimated net realizable value of the collateral on collateral
dependent loans. Large groups of small balance homogeneous loans are collectively evaluated for impairment. The Company does not
make additional loans to a borrower or any related interest of the borrower when a loan is past due in principal or interest more
than 90 days.
The Company reviews the net realizable
values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis. To determine the collateral
value, management utilizes independent appraisals and internal evaluations. These valuations are reviewed to determine whether
an additional discount should be applied given the age of market information or other factors such as costs to carry and sell an
asset. Currently it is our practice to obtain new appraisals on non-performing collateral dependent loans and/or other real estate
owned (“OREO”) semi-annually for land and every nine months on improved property. Based upon the appraisal, the Company
will, if an appraisal suggests a reduced value, adjust the recorded loan balance to the lower of cost or market value (less costs
to sell) and record a charge-off to the allowance for loan losses or designate a specific reserve within the allowance per accounting
principles generally accepted in the United States. Generally, the Company will record the charge-off rather than designate a specific
reserve.
OREO. OREO is property acquired
in satisfaction of debts previously contracted. It is recorded at the estimated fair value (less costs to sell) at the date of
acquisition and any resulting write-down is charged to the allowance for loan losses. Subsequent write-downs based upon re-evaluation
of the property are charged to non-interest expense. Upon acquisition of a particular property, all costs incurred in maintaining
the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent
they do not result in the recorded amount exceeding the property’s net realizable value.
Troubled Debt Restructures. A
modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial
difficulty and the modification constitutes a concession. There are various types of concessions when modifying a loan, however,
forgiveness of principal is rarely granted by the Company. Commercial and industrial loans modified in a TDR may involve
term extensions, below market interest rates and/or interest-only payments wherein the delay in the repayment of principal is determined
to be significant when all elements of the loan and circumstances are considered. Additional collateral, a co-borrower, or
a guarantor is often required. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest
rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for
new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may
also involve extending the interest-only payment period for the loan. Residential mortgage loans modified in a TDR are primarily
comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs. Land loans are typically
structured as interest-only monthly payments with a balloon payment due at maturity. Land loans modified in a TDR typically
involve extending the balloon payment by one to three years, and providing an interest rate concession. Home equity modifications
are made infrequently and are uniquely designed to meet the specific needs of each borrower.
TDRs are considered impaired and are reported
as impaired loans. Additionally, loans modified in a TDR are typically already on non-accrual status and partial charge-offs have
in some cases already been taken against the outstanding loan balance. An allowance for impaired loans that have been modified
in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest
rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan
is collateral dependent.
See Note 4 – “Loans”
in the audited consolidated financial statements included under Item 15 of this report for more information on TDRs as of December
31, 2014 and 2013.
PFC Statutory Trusts I and II
PFC Statutory Trust I and II are wholly
owned subsidiary trusts of the Company formed to facilitate the issuance of trust preferred securities (“TruPS”). The
trusts were organized in December 2005 and June 2006 in connection with two offerings of trust preferred securities. For more information
regarding the Company's issuance of trust preferred securities, see Note 10 "Junior Subordinated Debentures" to the audited
consolidated financial statements included under Item 15 of this report.
Competition
Competition in the banking industry is
significant. Banks face a number of competitors with respect to providing banking services and attracting deposits. Competition
comes from both bank and non-bank sources and from both large national, regional and smaller local institutions. The Bank competes
in Grays Harbor County with well-established thrifts which are headquartered in the area along with branches of large banks with
headquarters outside the area. The Bank also competes with well-established small community banks, branches of large banks, thrifts
and credit unions in Pacific and Wahkiakum Counties in the state of Washington and Clatsop County in the state of Oregon. In Whatcom,
Clark, Thurston and Skagit Counties, Washington, and Salem, Oregon the Bank also competes with large regional and super-regional
financial institutions that do not have a significant presence in the Company's historical market areas. The Company believes Whatcom,
Clark and Thurston Counties, in Washington and the Salem, Oregon area provides opportunities for expansion, but in pursuing that
expansion, it faces greater competitive challenges than it faces in its historical market areas.
Large financial conglomerates frequently
offer multiple financial services, including deposit services, brokerage and others and when combined with technological developments
such as the Internet that have reduced barriers to entry faced by companies physically located outside the Company's market areas,
have resulted in increased competition.
There has been significant consolidation
trends among financial institutions over the last few years, and the trends may continue. While, there may be opportunities for
Pacific to acquire customers, personnel, and perhaps assets or even branches, the ability to do so will depend on Pacific's financial
condition, as well as on its ability to compete successfully with other financial institutions when opportunities arise. Many competitive
institutions have greater resources and better access to capital markets than we do, which may make it difficult for us to compete
successfully for growth opportunities.
The Company has been able to maintain a
competitive advantage in its historical markets as a result of its status as a local institution, offering products and services
tailored to the needs of the community. Further, because of the extensive experience of management in its market area and the business
contacts of management and the Company's directors, management believes the Company can continue to compete effectively.
According to the Market Share Report compiled
by the FDIC, as of June 30, 2014, the Company held a deposit market share of 40.8% in Pacific County, 66.4% in Wahkiakum County,
28.6% in Grays Harbor County, 4.6% in Whatcom County, 1.3% in Skagit County and 7.0% in Clatsop County (Oregon).
Employees
As of December 31, 2014, the Bank employed
234 full time equivalent employees. We place a high priority on staff development. New employees are selected based upon their
technical skills and customer service capabilities. None of our employees are covered by a collective bargaining agreement. We
offer a variety of employee benefits and management believes relations with its employees are good.
Supervision and Regulation
The following is a general description
of certain significant statutes and regulations affecting the banking industry. The laws and regulations applicable to the Company
and its subsidiaries are primarily intended to protect depositors and borrowers of the Bank and not stockholders of the Company.
Various proposals to change the laws and regulations governing the banking industry are pending in Congress, in state legislatures
and before the various bank regulatory agencies and new or amended proposals are expected. In the current economic climate and
regulatory environment, the likelihood of enactment of new banking legislation and promulgation of new banking regulations is significantly
greater than it has been in recent years. The potential impact of new laws and regulations on the Company and its subsidiaries
cannot be determined, but any such laws and regulations may materially affect the business and prospects of the Company and its
subsidiaries. Violation of the laws and regulations applicable to the Company and its subsidiaries may result in assessment of
substantial civil monetary penalties, the imposition of a cease and desist or similar order, and other regulatory sanctions, as
well as private litigation.
The Company
General
As a bank holding company, the Company
is subject to the Bank Holding Company Act of 1956, as amended (BHCA), which places the Company under the primary supervision of
the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company must file annual reports
with the Federal Reserve and must provide it with such additional information as it may require. In addition, the Federal Reserve
periodically examines the Company and the Bank.
Bank Holding Company Regulation
General. The BHCA restricts the
direct and indirect activities of the Company to banking, managing or controlling banks and other subsidiaries authorized under
the BHCA, and activities that are closely related to banking or managing or controlling banks. The Company must obtain approval
of the Federal Reserve before it: (1) acquires direct or indirect ownership or control of any voting shares of any bank or bank
holding company that results in total ownership or control, directly or indirectly, of more than 5% of the outstanding shares of
any class of voting securities of such bank or bank holding company; (2) merges or consolidates with another bank holding company;
or (3) acquires substantially all of the assets of another bank or bank holding company. In acting on applications for such prior
approval, the Federal Reserve considers various factors, including, without limitation, the effect of the proposed transaction
on competition in relevant geographic and product markets, and each transaction party's financial condition, managerial resources,
and the convenience and needs of the communities to be served, including the performance record under the Community Reinvestment
Act.
Source of Strength. Under Federal
Reserve policy, the Company must act as a source of financial and managerial strength to the Bank. This means that the Company
is required to commit, as necessary, resources to support the Bank, and that under certain conditions, the Federal Reserve may
conclude that certain actions of Company, such as payment of cash dividends, would constitute unsafe and unsound banking practices.
Dodd-Frank Act. In addition, under
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the FDIC has back-up
enforcement authority over a depository institution holding company, such as the Company, if the conduct or threatened conduct
of a holding company poses a risk to the Deposit Insurance Fund, subject to certain limitations.
Effects of Government Monetary Policy
Banking is a business which depends on
interest rate differentials. In general, the major portions of a bank's earnings derives from the differences between: (i) interest
received by a bank on loans extended to its customers and the yield on securities held in its investment portfolio; and (ii) the
interest paid by a bank on its deposits and its other borrowings (the bank's "cost of funds"). Thus, our earnings and
growth are constantly subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary,
fiscal and related policies of the United States and its agencies, particularly the Federal Reserve and the U.S. Treasury. The
nature and timing of changes in such policies and their impact cannot be predicted.
The Bank
General
The Bank, as an FDIC insured state-chartered
bank, is subject to regulation and examination by the FDIC and the Washington Division. The federal laws that apply to the Bank
regulate, among other things, the scope of its business activities, its investments, its reserves against deposits, the timing
of the availability of deposited funds and the nature and amount of and collateral for loans.
CRA. The Community Reinvestment
Act (the CRA) requires that the FDIC evaluate the Bank’s record in meeting the credit needs of its local community, including
low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered
in evaluating mergers, acquisitions, and applications to open a branch or facility. In connection with the FDIC's assessment of
the record of financial institutions under the CRA, it assigns a rating of either, "outstanding," "satisfactory,"
"needs to improve," or "substantial noncompliance" following an examination. The Bank received a CRA rating
of "satisfactory" during its most recent examination.
Insider Credit Transactions.
Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers,
directors, principal shareholders, or any related interests of such persons. Extensions of credit (i) must be made on substantially
the same terms, including interest rates and collateral, and follow credit underwriting procedures that are not less stringent
than those prevailing at the time for comparable transactions with persons not covered above and who are not employees and (ii)
must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain
lending limits and restrictions on overdrafts to such persons.
FDICIA. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), each federal banking agency has prescribed, by regulation, noncapital
safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems,
and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality,
earnings and stock valuation. An institution which fails to meet these standards must develop a plan acceptable to the agency,
specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject
the institution to regulatory sanctions. Management believes that the Bank meets all such standards and, therefore, does not believe
that these regulatory standards will materially affect the Company's business or operations.
Safety and Soundness Standards.
The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety
and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information
systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings. In general, the safety and soundness guidelines prescribe the goals to be achieved in
each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution
fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require
the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator,
the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the
regulator's order is cured, the regulator may restrict the institution's rate of growth, require the institution to increase its
capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems
appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also
constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil
money penalty assessments. Management of the Bank is not aware of any conditions relating to these safety and soundness standards
which would require submission of a plan of compliance.
Dodd-Frank Act
On July 21, 2010, the Dodd-Frank Act was
signed into law and implements far-reaching changes across the financial regulatory landscape, including provisions that, among
other things, will:
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Centralize responsibility for consumer financial protection by creating a new agency within the Federal Reserve, the Bureau of Consumer Financial Protection, with broad rule making, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts. Smaller financial institutions, including the Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws. |
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Require the federal banking regulators to promulgate new capital regulations and seek to make their capital requirements countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction. |
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Provide for new disclosures and other requirements relating to executive compensation and corporate governance. |
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Change the assessment base for federal deposit insurance from deposits to average total assets minus tangible equity. |
Many aspects of the Dodd-Frank Act are
subject to ongoing rule-making. These rules are expected to increase regulation of the financial services industry and impose restrictions
on the ability of firms within the industry to conduct business consistent with historical practices. These rules will, as examples,
impact the ability of financial institutions to charge certain banking and other fees, allow interest to be paid on demand deposits,
impose new restrictions on lending practices and require depository institution holding companies to maintain capital levels at
levels not less than the levels required for insured depository institutions. Compliance with such legislation or regulation may,
among other effects, significantly increase our costs, limit our product offerings and operating flexibility, decrease our revenue
opportunities, require significant adjustments in our internal business processes, and possibly require us to maintain our regulatory
capital at levels above historical levels.
Jumpstart Our Business Startups (“JOBS”)
Act
On April 5, 2012, the JOBS Act was signed
into law. Among other things, the JOBS act contains provisions that reduce certain reporting requirements for qualifying public
companies. The JOBS Act also allows banks and bank holding companies to terminate the registration of a class of securities under
Section 12(g) and Section 12(b) of the Exchange Act if such class is held of record by less than 1,200 persons, an increase from
the prior 300 person threshold.
The Company expects to file a Form 15 to terminate the registration of its common stock under the Exchange Act in April 2015,
utilizing the increased thresholds under the JOBS Act.
The Volcker Rule
On December 10, 2013, the federal banking
agencies jointly issued a final rule implementing the so-called “Volcker Rule” (set forth in Section 619 of the Dodd-Frank
Act). The Volcker Rule prohibits depository institutions, companies that control such institutions, bank holding companies, and
the affiliates and subsidiaries of such banking entities, from engaging as principal for the trading account of the banking entity
in any purchase or sale of one or more covered financial instruments (so-called “proprietary trading”) and imposes
limitations upon retaining ownership interests in, sponsoring, investing in and transacting with certain investment funds, including
hedge funds and private equity funds. Certain activities involving underwriting, risk mitigation hedging, and transactions on behalf
of customers as a fiduciary or riskless principal are not prohibited proprietary trading, including purchases and sales of financial
instruments which are either obligations of or issued or guaranteed by (i) the United States or agencies thereof; (ii) a State
or political subdivision including municipal securities; or (iii) the FDIC. Notwithstanding these permissible activities, no such
activities are permitted if they would (i) involve or result in a material conflict of interest between the banking entity and
its clients, customers, or counterparties; (ii) result, directly or indirectly, in a material exposure by the banking entity to
a high-risk asset or a high-risk trading strategy; or (iii) pose a threat to the safety and soundness of the banking entity or
to the financial stability of the United States. The effective date of the final rule has been extended to July 21, 2016. Neither
the Company nor the Bank engages in activities prohibited by the Volcker Rule and does not expect the Volcker Rule to have a material
impact upon the Company or the Bank.
Deposit Insurance
The deposits of the Bank are insured to
a maximum of $250,000 per depositor through the Deposit Insurance Fund administered by the FDIC. All insured banks are required
to pay semi-annual deposit insurance premium assessments to the FDIC. A bank’s assessment is calculated by multiplying its
assessment rate (see below) by its assessment base. A bank’s assessment base is its average consolidated total assets minus
its average tangible equity.
The FDIC currently assesses deposit insurance
premiums on each FDIC-insured institution quarterly based on annualized rates for one of four risk categories applied to its deposits,
subject to certain adjustments. Each institution is assigned to one of four risk categories based on its capital, supervisory ratings
and other factors. Well capitalized institutions that are financially sound with only a few minor weaknesses are assigned to Risk
Category I. Risk Categories II, III and IV present progressively greater perceived risks to the DIF. Under FDIC's current risk-based
assessment rules for institutions with less than $10 billion in assets, the initial base assessment rates prior to adjustments
range from 5 to 9 basis points for Risk Category I, 14 basis points for Risk Category II, 23 basis points for Risk Category III,
and 35 basis points for Risk Category IV.
Initial base assessment rates are subject
to adjustments based on an institution's unsecured debt and brokered deposits, such that the total base assessment rates after
adjustments range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points
for Risk Category III, and 30 to 45 basis points for Risk Category IV. The FDIC’s regulations include authority to increase
or decrease total base assessment rates in the future by as much as three basis points without a formal rulemaking proceeding.
The FDIC may make special assessments on
insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay
amounts borrowed from the U.S. Treasury and other sources, or for any other purpose the FDIC deems necessary.
Dividends
Dividends from the Bank constitute the
major source of liquidity for the Company, from which the Company may cover its expenses, pay interest on its obligations, including
its debentures issued in connection with trust preferred securities, and declare and pay dividends to shareholders. The amount
of dividends payable by the Bank to the Company depends on the Bank's earnings and capital position, and is limited by federal
and state laws, regulations and policies.
Electronic Funds Transfer Act.
The electronic Funds Transfer Act (the
“EFTA”) provides a basic framework for establishing the rights, liabilities, and responsibilities of participants in
electronic funds transfer (EFT) systems. The EFTA is implemented by the Federal Reserve's Regulation E which governs transfers
initiated through ATMs, point-of-sale terminals, payroll cards, automated clearinghouse (ACH) transactions, telephone bill-payment
plans, or remote banking services. Regulation E was amended to require bank customers in 2010 to opt in (affirmatively consent)
to participation in overdraft service programs for ATM and one-time debit card transactions before overdraft fees may be assessed
on the customer's account and provides an ongoing right to revoke consent to participation. For customers who do not affirmatively
consent to overdraft service for ATM and one-time debit card transactions, a bank must provide those customers with the same account
terms, conditions, and features that it provides to consumers who do affirmatively consent, except for the overdraft service.
Real Estate Concentration Guidance
Banks are subject to real estate concentration
guidelines issued by federal banking agencies regarding sound risk management practices for concentrations in commercial real estate
lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real
estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to
real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not
to limit a bank's commercial real estate lending but to guide banks in developing risk management practices and capital levels
commensurate with the level and nature of real estate concentrations. Real estate concentration guidelines are as follows:
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Total reported loans for construction, land development and other land representing 100% or more of the bank's capital; or |
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Total commercial real estate loans representing 300% or more of the bank's total capital. |
The strength of an institution's lending
and risk management practices with respect to such concentrations will be taken into account in supervisory evaluation of capital
adequacy. At December 31, 2014 and 2013, the Bank was in compliance with the guidelines described above.
Capital Adequacy
Federal bank regulatory agencies use capital
adequacy guidelines in the examination and regulation of bank holding companies and banks. If capital falls below minimum levels,
the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open
new facilities.
The FDIC and Federal Reserve use risk-based
capital guidelines for banks and bank holding companies. Risk-based guidelines are designed to make capital requirements more sensitive
to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid low-risk assets. Assets and off-balance sheet items are assigned to broad risk categories, each
with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. The guidelines are minimums and the FDIC or the Federal Reserve may require that a holding company or bank, as applicable,
maintain ratios in excess of the minimums, particularly organizations contemplating significant expansion. Current guidelines require
all bank holding companies and federally-regulated banks to maintain a minimum total risk-based capital ratio equal to 8%, of which
at least 4% must be Tier I capital. Tier I capital for bank holding companies includes common shareholders' equity, certain qualifying
preferred stock and minority interests in equity accounts of consolidated subsidiaries, minus certain deductions, including, without
limitation, goodwill, other identifiable intangible assets, and certain deferred tax assets.
The FDIC or the Federal Reserve also employ
a leverage ratio, calculated as Tier I capital as a percentage of total assets minus certain deductions, including, without limitation,
goodwill, mortgage servicing assets, other identifiable intangible assets, and certain deferred tax assets, to be used as a supplement
to risk-based guidelines. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding
company may leverage its equity capital base. The Company must maintain a minimum leverage ratio of 4.0%. The Bank must maintain
a minimum leverage ratio of 5.0% in order to meet the regulatory definition of “Well Capitalized”.
Under regulations adopted by the Federal
Reserve and the FDIC, each bank holding company and bank is assigned to one of five capital categories depending on, among other
things, its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective
factors. Institutions which are deemed to be undercapitalized depending on the category to which they are assigned are subject
to certain mandatory supervisory corrective actions. Under these guidelines, the Company and the Bank are each considered well
capitalized as of the end of the fiscal year.
Effective January 1, 2015 (with some changes
generally transitioned into full effectiveness over two to four years), the Bank will be subject to new capital requirements adopted
by the FDIC in order to implement the “Basel III” regulatory capital reforms released by the Basel Committee on Banking
Supervision. These new requirements create a new required ratio for common equity Tier 1 (“CET1”) capital, increases
the leverage and Tier 1 capital ratios, changes the risk-weights of certain assets for purposes of the risk-based capital ratios,
creates an additional capital conservation buffer over the required capital ratios and changes what qualifies as capital for purposes
of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer
will limit the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses.
When these new requirements to be considered
well-capitalized become effective in 2015, the Bank's leverage ratio of 4% of adjusted total assets and total capital ratio of
8% of risk-weighted assets will remain the same; however, the Tier 1 capital ratio requirement will increase from 4.0% to 6.0%
of risk-weighted assets. In addition, the Bank will have to meet the new CET1 capital ratio of 4.5% of risk-weighted assets, with
CET1 consisting of qualifying Tier 1 capital less all capital components that are not considered common equity.
For all of these capital requirements,
there are a number of changes in what constitutes regulatory capital, some of which are subject to a two-year transition period.
These changes include the phasing-out of certain instruments as qualifying capital. The Bank does not have any of these instruments.
Under the new requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total
capital.
Mortgage servicing rights, certain deferred
tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be deducted from capital,
subject to a two-year transition period. In addition, Tier 1 capital will include accumulated other comprehensive income (loss),
which includes all unrealized gains and losses on available for sale debt and equity securities, subject to a two-year transition
period. Because of its asset size, the Bank has the one-time option of deciding in the first quarter of 2015 whether to permanently
opt-out of the inclusion of accumulated other comprehensive income (loss) in its capital calculations. The Bank has elected to
opt-out of the inclusion of accumulated other comprehensive income (loss) in its capital calculations to reduce the impact of market
volatility on its regulatory capital levels.
The new requirements also include changes
in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from
100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential
mortgage loans that are 90 days past due or otherwise on non-accrual status; a 20% (up from 0%) credit conversion factor for the
unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently
set at 0%); a 250% risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from
capital; and increased risk-weights (0% to 600%) for equity exposures.
In addition to the minimum CET1, Tier 1
and total capital ratios, the Bank will have to maintain a capital conservation buffer. This buffer consists of additional CET1
capital equal to 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends,
engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be
utilized for such actions. This new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625%
of risk-weighted assets and increasing each year until fully implemented at 2.5% in January 2019.
On November 18, 2014, the FDIC adopted
the Assessments Final Rule which revises the FDIC’s risk-based deposit insurance assessment system to reflect changes in
the regulatory capital rules that are effective commencing January 1, 2015. For smaller financial institutions (with total assets
less than $1 billion and which are not custodial banks), the Final Rule revises and conforms capital ratios and ratio thresholds
to the new prompt corrective action capital ratios and ratio thresholds for “well capitalized” and “adequately
capitalized” evaluations which were adopted by the federal banking agencies as part of the Basel III capital regulations.
Consequently, effective January 1, 2015, the prompt corrective action regulations are amended to the extent described above. Under
the new standards, in order to be considered well-capitalized, the Bank would be required to have a CET1 ratio of 6.5% (new), a
Tier 1 ratio of 8% (increased from 6%), a total capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged). A pro
forma analysis of the application of these new capital requirements as of December 31, 2014 has been conducted on the Company and
Bank. We have determined that the Company and Bank meet all new requirements, including the fully phased-in capital conservation
buffer requirement, and would remain well-capitalized even if these new requirements had been in effect on that date.
The application of these stringent capital
requirements could, among other things, result in lower returns on invested capital, over time require the raising of additional
capital, and result in regulatory actions if we were to be unable to comply with such requirements. Implementation of changes to
asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or
additional capital conservation buffers could result in management modifying its business strategy and could limit our ability
to make distributions, including paying out dividends or repurchasing shares. Furthermore, the imposition of liquidity requirements
in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure
our business models, and/or increase our holdings of liquid assets. Any additional changes in our regulation and oversight, in
the form of new laws, rules and regulations could make compliance more difficult or expensive or otherwise materially adversely
affect our business, financial condition or prospects.
The following are material risks that management
believes are specific to our business. This should not be viewed as an all-inclusive list or in any particular order.
Weak economic conditions in the market areas we serve may
adversely impact our earnings and could increase the credit risk associated with our loan portfolio.
Substantially all of our loans are to businesses
and individuals in the states of Washington and Oregon. A decline in the economies of our local market areas could have a material
adverse effect on our business, financial condition, results of operations and prospects.
Although conditions have improved, any
economic deterioration that affects household and or business incomes in the markets in which we do business could have one or
more of the following adverse effects on our business:
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An increase in loan delinquencies, problem assets and foreclosures; |
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A decrease in the demand for loans and other fee-based products and services; |
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An increase or decrease in the usage of unfunded commitments; or |
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A decrease in the value of loan collateral, especially real estate, which in turn may reduce a customer's borrowing power and significantly increase our exposure to particular loans. |
A large percentage of our loan portfolio
is secured by real estate, in particular commercial real estate, and as a result, we are susceptible to deterioration in the real
estate market in our local areas. If this were to occur, it would lead to increased delinquencies and related losses in our loan
portfolio, which could have a material adverse effect on our business, financial condition and results of operations.
Our current business strategy is heavily
focused on commercial real estate lending, which is already a significant portion of our loans. This type of lending activity is
generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. Collateral evaluation
and financial statement analysis in these types of loans requires a more detailed analysis at the time of loan underwriting and
on an ongoing basis. A downturn in the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly
impair the value of our collateral and our ability to sell the collateral upon any foreclosure. Commercial real estate loans also
typically involve higher principal amounts than other types of loans, and repayment is dependent upon income generated, or expected
to be generated, by the property securing the loan, which may be adversely affected by changes in the economy or local market conditions.
Commercial real estate loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral
securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial real estate
loans are not fully amortizing and may require balloon payments upon maturity. Such balloon payments may force the borrower to
either sell or refinance the underlying property in order to make the payment, which may increase the risk of default.
A secondary market for most types of commercial
real estate loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest
in these loans. As a result of these characteristics, if we foreclose on a commercial real estate loan, our holding period of the
collateral typically is longer than for residential mortgage loans. Accordingly, charge-offs on commercial real estate loans may
be larger as a percentage of the total principal outstanding than those incurred with our residential or consumer loan portfolios.
Future credit losses may exceed our allowance for loan losses.
We are subject to credit risk, which is
the risk of losing principal or interest due to borrowers' failure to repay loans in accordance with their terms. A continued or
sustained downturn in the economy or the real estate market in our market areas or a rapid change in interest rates would have
a negative effect on borrowers' ability to repay loans and on collateral values. This deterioration could result in losses to the
Company in excess of the allowance for loan losses. To the extent loans are not paid timely by borrowers, the loans are placed
on non-accrual status, thereby reducing interest income or even requiring reversals of previously recorded income. To the extent
loan charge-offs exceed our financial models, increased amounts will be charged to the provision for credit losses, which would
further reduce income.
We may be required to increase our provision for credit losses
and charge-off additional loans in the future, which could adversely affect our financial condition and results of operations.
For the year ended December 31, 2014, we
recorded a provision for (recapture of) credit losses of $300,000, compared to ($450,000) for the year ended December 31, 2013.
Whether or not we determine to record a provision in a particular period has a significant effect on our earnings. We recorded
net loan charge-offs of $306,000 for the year ended December 31, 2014, compared to $549,000 for the year ended December 31, 2013.
Past due loans represented 1.3% and 1.4% of total loans outstanding at December 31, 2014 and 2013, respectively.
While current economic conditions have
improved modestly, we may experience increased delinquencies and credit losses if these improvements falter, resulting in additional
provision for credit losses and charge offs and a possible material adverse effect on our financial condition and results of operations.
Further, our portfolio contains construction and land loans and commercial and commercial real estate loans, all of which have
a higher risk of loss than residential real estate loans.
See "Business Overview" in Part II, Item 7
of this report for further discussion.
We hold and acquire other real estate owned properties as
part of our business, which can lead to increased operating expenses and vulnerability to additional declines in the market value
of real estate in our areas of operations.
We foreclose on and take title to the real
estate serving as collateral for debts previously contracted as part of the problem asset resolution process. OREO balances lead
to increased expenses, as we incur costs to manage, maintain, improve in some cases, and dispose of our OREO properties. We expect
that earnings in 2015 will continue to be negatively affected, albeit to a lesser extent, by various expenses associated with OREO,
including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments, and other expenses associated
with property ownership. Loans currently in nonaccrual status may lead to increases in our OREO balance in the future, if not resolved.
At the time that we foreclose on a loan and take possession of a property we estimate the value of that property using third party
appraisals and opinions and internal judgments. OREO property is valued on our books at the estimated market value of the property,
less the estimated costs to sell (or "fair value"). Upon foreclosure, a charge-off to the allowance for loan losses is
recorded for any excess between the value of the asset on our books over its fair value. Thereafter, we periodically reassess our
judgment of fair value based on updated appraisals or other factors, including, at times, at the request of our regulators. Any
further declines in our estimate of fair value for OREO will result in additional charges, with a corresponding expense in our
statements of income that is recorded under the line item for "OREO Write-downs." As such, our results of operations
are vulnerable to declines in the market for residential and commercial real estate in the areas in which we operate. The expenses
associated with OREO and any further property write downs could have a material adverse effect on our results of operations and
financial condition.
We face liquidity risks in the operation of our business
and our funding sources may prove insufficient to support growth opportunities or satisfy our liabilities.
Liquidity is crucial to the operation of
the Company and the Bank. Liquidity risk is the potential that we will be unable to fund increases in assets or meet payment
obligations as they become due because of an inability to obtain adequate funding or liquidate assets. For example,
funding illiquidity may arise if we are unable to attract core deposits or are unable to renew at acceptable pricing long-term
or short-term borrowings. Illiquidity may also arise if our regulatory capital levels decrease, our lenders require additional
collateral to secure our repayment obligations, or a large amount of our deposits are withdrawn.
We rely on customer deposits and advances
from the FHLB of Seattle and other borrowings to fund our operations. Although we have historically been able to replace maturing
deposits and advances if desired, we may not be able to replace such funds in the future if our financial condition or the financial
condition of the FHLB of Seattle were to change, or market conditions were to deteriorate. If we are required to rely more heavily
on more expensive funding sources to support operations, our revenues may not increase proportionately to cover our costs. In this
case, our net interest margin would be adversely affected, making it even more difficult for our businesses to operate profitably.
Rapidly changing interest rate environments could reduce
our net interest margin, net interest income, fee income and net income.
Interest and fees on loans and securities,
net of interest paid on deposits and borrowings, are a large part of our net income. Interest rates are key drivers of our net
interest margin and subject to many factors beyond the control of management. As interest rates change, net interest income is
affected. Rapid increases in interest rates in the future could result in interest expense increasing faster than interest income
because of mismatches in financial instrument maturities, which would result in reduced spreads between the interest rates earned
on assets and the rates of interest paid on liabilities. Further, substantially higher interest rates generally reduce loan demand
and may hinder loan growth, particularly in commercial real estate lending, an important factor in the Company's revenue over the
past two years.
Gain on sale of loans held for sale represents a significant
source of our non-interest income and may be adversely affected by any changes in the programs offered by secondary market investors
or our ability to qualify for such programs, as well as by any increases in market interest rates.
The sale of residential mortgage loans
classified as loans held for sale provides a significant portion of our non-interest income. Changes in programs applicable to
the resale of residential mortgages or our eligibility to participate in such programs could materially adversely affect our results
of operations. Further, in a rising interest rate environment, our originations of mortgage loans held for sale may decrease, resulting
in fewer loans that are available to be sold. This would result in a decrease in gain on sale of loans sold and a corresponding
decrease in non-interest income. During periods of reduced loan demand, our results of operations may be further adversely affected
if we are unable to reduce our expenses proportionately to the decline in the volume of loan originations and sales. For 2015,
we expect residential mortgage loan demand to continue to decline to the extent that interest rates stay above prior record lows.
We may elect or be required to seek additional capital in
the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory
authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise capital to support
our business or to finance acquisitions, if any. Our ability to raise additional capital, if needed, will depend on conditions
in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial
performance. Accordingly, we cannot assure you of our ability to raise additional capital on terms acceptable to us, or at all.
If we do raise capital, equity financing may be dilutive to existing shareholders and any debt financing may include covenants
or other restrictions that limit our operating flexibility. If we cannot raise additional capital when needed on favorable terms,
it may have a material adverse effect on our financial condition, results of operations and prospects.
We operate in a highly regulated environment
and changes of or increases in, or supervisory enforcement of, banking or other laws and regulations could adversely affect us.
As discussed more fully in the section
entitled "Supervision and Regulation" in Item 1 above, we are subject to extensive regulation, supervision and examination
by federal and state banking authorities. Additional legislation and regulations that could significantly affect our powers, authority
and operations may be enacted or adopted in the future. Further, regulators have significant discretion and authority to prevent
or remedy unsafe or unsound practices or violations of laws or regulations in the performance of their supervisory and enforcement
duties. Any failure to comply with laws, regulations or interpretations could result in sanctions by regulatory agencies or damage
to our reputation. Any changes in applicable regulations or federal, state or local legislation, in regulatory policies or interpretations,
or in regulatory approaches to compliance and enforcement could have a substantial impact on our financial condition and our result
of operations, for example, by leading to additional fees or taxes or restrictions on our operations.
Recent legislation has impacted our
operations, and additional legislation and rulemaking could have an adverse impact on our business.
The Dodd-Frank Act has significantly changed
the current bank regulatory structure and will affect the lending, deposit, investment, trading and operating activities of financial
institutions and their holding companies. Among other things, the Dodd-Frank Act:
| |
· |
establishes the Bureau of Consumer Financial Protection with broad authority to administer and enforce a new federal regulatory framework of consumer financial regulation; |
| |
· |
changes the base for deposit insurance assessments; |
| |
· |
introduces regulatory rate-setting for interchange fees charged to merchants for debit card transactions; |
| |
· |
enhances the regulation of consumer mortgage banking; and |
| |
· |
changes the methods and standards for resolution of troubled institutions. |
Many of the provisions of the Dodd-Frank
Act have extended implementation periods and delayed effective dates and will require additional rulemaking by various regulatory
agencies, and many could have far reaching implications on our operations. Accordingly, we expect that the legislation may have
a detrimental impact on revenue and expense, require the Company to change certain of its business practices, increase capital
levels and have other adverse effects on our business. Moreover, compliance obligations will expose us to additional reputational
risk in the event of noncompliance and could divert management's focus from the business of banking.
The short-term and long-term impact
of the changing regulatory capital requirements and anticipated new capital rules is uncertain.
As mentioned under the heading “Supervision
and Regulation” in Item 1 above, effective January 1, 2015, the Company and the Bank will each be subject to new capital
requirements under regulations adopted by the federal banking regulators to implement the Basel III regulatory capital reforms
and changes required by the Dodd-Frank Act. In addition, in the current economic and regulatory environment, regulators of banks
and bank holding companies have become more likely to impose capital requirements that are more stringent than those required by
existing regulations. The application of more stringent capital requirements for the Company and the Bank could, among other things,
result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if we
were unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with Basel III
could result in our having to lengthen the terms of our funding, restructure our business models, and/or increase our holdings
of liquid assets. Implementation of changes to asset risk weightings for risk based capital calculations, and/or additional capital
conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions,
including paying dividends or buying back shares. Any additional changes in our regulation and oversight, in the form of new laws,
rules and regulations could make compliance more difficult or expensive or otherwise materially adversely affect our business,
financial condition or prospects.
We rely on dividends from the Bank for substantially all
of our liquidity.
The Company is a separate and distinct
legal entity from the Bank. The Company receives substantially all of its liquidity from dividends from the Bank. These dividends
are the principal source of funds to pay interest and principal on our debt, other expenses, or dividends on our common stock,
if any. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company, as may
the actions of regulators. If the Bank is unable to pay dividends to the Company, it may not be able to service debt, pay any other
obligations or pay dividends on common stock. The Company paid a cash dividend of $0.21 and $0.20 per share for 2014 and 2013,
respectively.
The financial services industry is very competitive.
We face competition in attracting and retaining
deposits, making loans, and providing other financial services. Our competitors include other community banks, larger banking institutions,
and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies,
insurance companies and other non-bank businesses. Many of these competitors have substantially greater resources than we have.
For a more complete discussion of our competitive environment, see "Business-Competition" in Item 1 above. If we are
unable to compete effectively, we will lose market share, including deposits, and face a reduction in our income from our lending
activities.
Technology implementation problems,
computer system failures or information security breaches could adversely affect us.
Our future growth prospects will be highly
dependent on the ability of the Bank to implement changes in technology that affect the delivery of banking services such as the
increased demand for computer access to bank accounts and the availability to perform banking transactions electronically. The
Bank’s ability to compete will depend upon its ability to continue to adapt technology on a timely and cost-effective basis
to meet such demands. In addition, our business and operations and those of the Bank could be susceptible to adverse effects from
computer failures, communication and energy disruption, and activities such as fraud of unethical individuals with the technological
ability to cause disruptions or failures of the Bank’s data processing system.
If there
is unauthorized disclosure of sensitive or confidential client, customer or employee information, whether through a breach of our
computer systems or otherwise, it could harm our business. As part of our business, we collect, process and retain sensitive and
confidential client, customer and employee information. Despite the various security measures we have in place, our facilities
and systems may be vulnerable to security breaches, computer viruses, data retention failures, human errors, or other similar events.
We cannot be certain that the continued
implementation of safeguards will eliminate the risk of vulnerability to technological difficulties or failures or ensure the absence
of a breach of information security. The Bank will continue to rely on the services of various vendors who provide data processing
and communication services to the banking industry. Nonetheless, if information security is compromised or other technology difficulties
or failures occur at the Bank or with one of our vendors, information may be lost or misappropriated, services and operations may
be interrupted and the Bank could be exposed to claims from its customers, regulatory actions, reputational damage, and disruptions
in its operations, resulting in a material adverse effect on the Company's results of operations.
We may experience difficulties in managing
our growth and our growth strategy involves risks that may negatively impact our net income.
As part of our general growth strategy,
we may acquire branches or banks and establish new branches that we believe provide a strategic and geographic fit with our business.
We cannot predict the number, size or timing of growth opportunities. To the extent that we grow through acquisitions, we cannot
assure you that we will be able to adequately and profitably integrate these new assets and manage this growth. Acquiring other
branches and businesses will involve risks commonly associated with acquisitions, including:
| |
· |
Potential exposure to unknown or contingent liabilities we acquire; |
| |
· |
Exposure to potential asset quality issues; |
| |
· |
Difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; |
| |
· |
Potential disruption to our business; |
| |
· |
Potential restrictions on our business resulting from the regulatory approval process; |
| |
· |
Potential diversion of our management’s time and attention; and |
| |
· |
The possible loss of key employees and customers of the bank and businesses we acquire. |
In addition to acquisitions, we may expand
into additional communities or attempt to strengthen our position in our current markets by opening additional de novo branches
or new loan production offices. Based on our experience, we believe that it generally takes three years or more for new banking
facilities to first achieve operational profitability, due to the impact of organization and overhead expenses and the start-up
phase of generating loans and deposits. To the extent that we undertake additional branching and de novo bank and business formations,
we are likely to continue to experience higher operating expenses relative to operating income from the new operations, which may
have an adverse effect on our levels of reported net income, return on average equity and return on average assets.
Impairment of investment securities,
goodwill, other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact
on our results of operations.
The Bank has $93.2 million, or 12.5% of
assets, in investments and FHLB stock at December 31, 2014, and must periodically test our investment securities for impairment
in value. In assessing whether the impairment of investment securities is other-than-temporary, we consider the length of time
and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and
the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery
in fair value in the near term. Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment
tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a
reporting unit below its carrying amount. Although we do not presently anticipate goodwill impairment charges, if we conclude that
our goodwill may be impaired, a non-cash charge for the amount of such impairment would be recorded against earnings. Such a charge
would have no impact on tangible capital. At December 31, 2014, we had goodwill of $12.2 million, representing approximately
16.8% of shareholders’ equity.
Further, our balance sheet reflects approximately
$3.2 million of net deferred tax assets at December 31, 2014, recorded in other assets on the balance sheet, which represents differences
in the timing of the benefit of deductions, credits and other items for accounting purposes and the benefit for tax purposes. To
the extent we conclude that the value of this asset is not more likely than not to be realized, we would be obligated to record
a valuation allowance, impacting our earnings during the period in which the valuation allowance is recorded..
We may be subject to environmental and other liability risks
associated with lending activities.
We foreclose on and take title to real
estate in the regular course of our business. Property ownership increases our expenses due to the costs of managing and disposing
of properties. Although environmental site assessments are completed on properties that are considered an environment risk before
such properties are accepted as collateral, there remains a risk that hazardous or toxic substances will be found on properties,
in which case we may be liable for remediation costs and related personal injury and property damage and the value of the property
may be materially reduced. The costs and financial liabilities associated with property ownership could have a material adverse
effect on our results of operations and financial condition.
Our common stock is not listed on a
securities exchange and trading in our stock on the OTC Bulletin Board is limited, making it difficult for shareholders to sell
shares in open-market transactions and may cause our stock price to be volatile.
Our common stock trades in low trading
volumes on the OTCQB exchange sponsored by OTC Markets under the trading symbol "PFLC." As a result, it may be difficult
to liquidate your investment in our shares, and there may be wide fluctuations in our stock price. Also, because of this lack of
liquidity in the market for our common stock, the quoted price of our common stock from time to time may not reflect its fair value
as would be determined in an active trading market.
Our directors and executive officers
own a significant percentage of our common stock and this concentration of ownership could adversely affect our other shareholders.
Our directors and executive officers beneficially
own approximately 12.3% of our common stock. As a result, these individuals could, as a group, exert a significant degree of influence
over our management and affairs and over matters requiring shareholder approval, in addition to the influence they already have
as directors and executive officers. This concentration of ownership may limit the ability of other shareholders to influence corporate
matters and, as a result, we may take actions that our other shareholders do not view as beneficial. For example, this concentration
of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer
from attempting to obtain control of our company, which could limit your ability to sell your shares at a premium in connection
with a merger or other transaction resulting in a change in control of our company.
We depend on the accuracy and completeness
of information about customers and counterparties.
In deciding whether to extend credit or
enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including
financial statements, credit reports, and other financial information. We may also rely on representations of those customers,
counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information.
Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause us to enter
into unfavorable transactions, which could have a material adverse effect on our financial condition and results of operations.
We rely on other companies to provide
key components of our business infrastructure.
Third party vendors provide key components
of our business infrastructure such as internet connections, network access and core application processing. While we have selected
these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as
a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect
our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party
vendors could also entail significant delay and expense.
| ITEM 1.B. | Unresolved Staff Comments |
None
The Company's administrative offices are
located in Aberdeen, Washington. The building located at 300 East Market Street is owned by the Bank and houses the main branch.
The administrative offices of the Bank and the Company, which are leased from an unaffiliated third party, are located at 1101
S. Boone Street.
Pacific owns the land and buildings occupied
by its sixteen branches in Grays Harbor, Pacific, Skagit, Whatcom and Wahkiakum Counties in Washington
as well as Clatsop County in Oregon. The remaining locations operate in leased facilities, which are leased from unaffiliated third
parties. The aggregate monthly lease payment for all leased space is approximately $47,000.
In addition to the land and buildings owned
by Pacific, it also owns all of its furniture, fixtures and equipment, including data processing equipment. The net book value
of the Company's premises and equipment was $16.3 million at December 31, 2014.
Management believes that the facilities
are of sound construction and in good operating condition, are appropriately insured and are adequately equipped for carrying on
the business of the Bank.
The Company and the Bank from time to time
are party to various legal proceedings arising in the ordinary course of business. Management believes that there are no threatened
or pending proceedings against the Company or the Bank that will have a material adverse effect on its business, financial condition
or results of operations.
| ITEM 4. | Mine Safety Disclosures |
Not Applicable.
PART II
| ITEM 5. | Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities |
The Company's common stock is presently
traded on the OTC Bulletin Board™ under the trading symbol PFLC.OB. Historically, trading in our stock has been very limited
and the trades that have occurred cannot be characterized as amounting to an established public trading market.
The following are high and low bid prices
quoted on the OTC Bulletin Board during the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions:
| | |
2014 | | |
2013 | |
| | |
Estimated No. | | |
| | |
| | |
Estimated No. | | |
| | |
| |
| | |
Shares Traded | | |
High | | |
Low | | |
Shares Traded | | |
High | | |
Low | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| First Quarter | |
| 246,000 | | |
$ | 6.75 | | |
$ | 6.10 | | |
| 131,400 | | |
$ | 5.50 | | |
$ | 4.56 | |
| Second Quarter | |
| 61,200 | | |
$ | 6.50 | | |
$ | 6.07 | | |
| 92,300 | | |
$ | 6.50 | | |
$ | 5.42 | |
| Third Quarter | |
| 175,800 | | |
$ | 6.75 | | |
$ | 6.06 | | |
| 124,600 | | |
$ | 6.99 | | |
$ | 5.59 | |
| Fourth Quarter | |
| 101,200 | | |
$ | 6.90 | | |
$ | 6.05 | | |
| 83,900 | | |
$ | 6.75 | | |
$ | 6.40 | |
As of February 28, 2015, there were approximately
992 shareholders of record of the Company's common stock. Computershare serves as the transfer agent for our common stock.
The Company’s Board of Directors
declared dividends on its common stock in December 2014 and 2013 in the amount of $0.21 and $0.20 per share, respectively. The
Board of Directors has adopted a dividend policy which is reviewed annually. There can be no assurance as to whether or when the
Company will pay cash dividends again in the future.
Under federal banking law, the payment
of dividends by the Company and the Bank is subject to capital adequacy requirements established by the Federal Reserve and the
FDIC. In addition, payment of dividends by either entity is subject to regulatory limitations. Under Washington general corporate
law as it applies to the Company, no cash dividend may be declared or paid if, after giving effect to the dividend, the Company
would not be able to pay its liabilities as they become due or its liabilities exceed its assets. Payment of dividends on the Common
Stock is also affected by statutory limitations, which restrict the ability of the Bank to pay upstream dividends to the Company.
Under Washington banking law as it applies to the Bank, no dividend may be declared or paid in amount greater than net profits
then available, and after a portion of such net profits have been added to the surplus funds of the Bank.
Issuer Purchases of Equity Securities
In September 2012, the Company’s
board of directors approved a share repurchase program authorizing the purchase of up to 250,000 shares of its common stock. There
were no purchases of common stock by the Company during the year ended December 31, 2014. The maximum number of shares that may
yet be purchased under the plan is 250,000 at December 31, 2014.
| ITEM 6. | Selected Financial Data |
The following selected consolidated five
year financial data should be read in conjunction with the Company's audited consolidated financial statements and the accompanying
notes presented in this report. Dollars are in thousands, except per share data.
PACIFIC FINANCIAL CORPORATION
(Dollars in Thousands, Except per Share
Data)
| |
|
For Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
| Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
$ |
27,033 |
|
|
$ |
23,800 |
|
|
$ |
24,011 |
$ |
|
|
23,685 |
$ |
|
|
22,879 |
|
| Provision (recapture) for credit losses |
|
|
300 |
|
|
|
(450 |
) |
|
|
(1,100 |
) |
|
|
2,500 |
|
|
|
3,600 |
|
| Non-interest income |
|
|
8,079 |
|
|
|
9,955 |
|
|
|
9,391 |
|
|
|
7,614 |
|
|
|
8,451 |
|
| Non-interest expense |
|
|
28,155 |
|
|
|
29,502 |
|
|
|
28,417 |
|
|
|
25,648 |
|
|
|
26,400 |
|
| Provision (benefit) for income taxes |
|
|
1,730 |
|
|
|
972 |
|
|
|
1,300 |
|
|
|
333 |
|
|
|
(304 |
) |
| Net income |
|
$ |
4,927 |
|
|
$ |
3,731 |
|
|
$ |
4,785 |
$ |
|
|
2,818 |
$ |
|
|
1,634 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic(1) |
|
$ |
0.48 |
|
|
$ |
0.37 |
|
|
$ |
0.47 |
|
|
$ |
0.28 |
|
|
$ |
0.16 |
|
| Diluted(1) |
|
|
0.48 |
|
|
|
0.37 |
|
|
|
0.47 |
|
|
|
0.28 |
|
|
|
0.16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dividends declared |
|
$ |
2,178 |
|
|
$ |
2,036 |
|
|
$ |
2,024 |
|
|
$ |
- |
|
|
$ |
- |
|
| Dividends declared per share |
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
$ |
0.20 |
|
|
$ |
- |
|
|
$ |
- |
|
| Dividends payout ratio |
|
|
44 |
% |
|
|
55 |
% |
|
|
42 |
% |
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Performance Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest rate spread |
|
|
4.06 |
% |
|
|
3.87 |
% |
|
|
4.20 |
% |
|
|
4.03 |
% |
|
|
3.88 |
% |
| Net interest margin(1) |
|
|
4.17 |
% |
|
|
4.00 |
% |
|
|
4.34 |
% |
|
|
4.22 |
% |
|
|
4.10 |
% |
| Efficiency ratio(2) |
|
|
80.19 |
% |
|
|
87.40 |
% |
|
|
85.08 |
% |
|
|
81.95 |
% |
|
|
84.26 |
% |
| Return on average assets |
|
|
0.68 |
% |
|
|
0.55 |
% |
|
|
0.75 |
% |
|
|
0.44 |
% |
|
|
0.25 |
% |
| Return on average equity |
|
|
6.92 |
% |
|
|
5.48 |
% |
|
|
7.28 |
% |
|
|
4.55 |
% |
|
|
2.77 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
744,807 |
|
$ |
|
705,039 |
|
|
$ |
643,594 |
|
|
$ |
641,254 |
|
|
$ |
644,403 |
|
| Loans, net |
|
|
554,746 |
|
|
|
496,307 |
|
|
|
438,838 |
|
|
|
463,766 |
|
|
|
455,064 |
|
| Total deposits |
|
|
639,054 |
|
|
|
607,347 |
|
|
|
548,243 |
|
|
|
548,050 |
|
|
|
544,954 |
|
| Total borrowings |
|
|
24,856 |
|
|
|
23,403 |
|
|
|
23,903 |
|
|
|
24,644 |
|
|
|
35,328 |
|
| Shareholders' equity |
|
|
72,483 |
|
|
|
67,137 |
|
|
|
66,721 |
|
|
|
63,270 |
|
|
|
59,769 |
|
| Book value per share(3) |
|
|
6.99% |
|
|
|
6.59% |
|
|
|
6.59% |
|
|
|
6.25% |
|
|
|
5.90% |
|
| Tangible book value per share(4) |
|
|
5.68% |
|
|
|
5.25% |
|
|
|
5.35% |
|
|
|
5.01% |
|
|
|
4.66% |
|
| Equity to assets ratio |
|
|
9.73 |
% |
|
|
9.52 |
% |
|
|
10.37 |
% |
|
|
9.87 |
% |
|
|
9.28 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Asset Quality Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nonperforming loans to total loans |
|
|
1.62 |
% |
|
|
1.98 |
% |
|
|
3.37 |
% |
|
|
2.96 |
% |
|
|
2.15 |
% |
| Allowance for loan losses to total loans |
|
|
1.48 |
% |
|
|
1.66 |
% |
|
|
2.09 |
% |
|
|
2.34 |
% |
|
|
2.28 |
% |
| Allowance for loan losses to nonperforming loans |
|
|
91.54 |
% |
|
|
115.41 |
% |
|
|
61.92 |
% |
|
|
79.28 |
% |
|
|
106.18 |
% |
| Nonperforming assets to total assets |
|
|
1.36 |
% |
|
|
1.42 |
% |
|
|
3.08 |
% |
|
|
3.39 |
% |
|
|
2.57 |
% |
(1) Net interest income divided by average earning
assets
(2) Non-interest expense divided by the sum of net
interest income and non-interest income
(3) Shareholder equity divided by shares outstanding
(4) Shareholder equity less intangibles divided by
shares outstanding
| ITEM 7. | Management's Discussion and Analysis of Financial
Condition and Results of Operations |
Forward Looking Information
This report contains forward-looking statements
that are subject to risks and uncertainties. These statements are based on the current beliefs and assumptions of our management,
and on information currently available to them. Forward-looking statements include all information concerning our possible future
results of operations or other actions, including, without limitation, as set forth under "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and can frequently be identified by statements preceded by, followed by
or that include the words "believes," "expects," "anticipates," "intends," "plans,"
"estimates" or similar expressions.
Any forward-looking statements in this
document are subject to risks relating to, among other things, the factors described under the heading "Risk Factors"
in Item 1A below, as well as the following:
| |
1. |
changing laws, regulations, standards, and government programs and policies, that may limit our revenue sources, significantly increase our costs, including compliance and insurance costs, cause or contribute to rising interest rates, and place additional burdens on our limited management resources; |
| |
2. |
economic or business conditions, nationally and in the regions in which we do business, that have resulted in, and may continue to result in, among other things, challenges with respect to credit quality and/or reduced demand for credit and other banking services due to the dependency of repayment of our loans on the cash flows of the borrower and additional workout and other real estate owned expenses; |
| |
3. |
decreases in real estate and other asset prices, whether or not due to changes in economic conditions, that may reduce the value of the assets that serve as collateral for many of our loans; |
| |
4. |
competitive pressures among depository and other financial institutions that may impede our ability to attract and retain depositors, borrowers and other customers, retain our key employees, and/or maintain and improve our net interest margin and income and non-interest income, such as fee income; |
| |
5. |
a lack of liquidity in the market for our common stock that may make it difficult or impossible for you to liquidate your investment in our stock or lead to distortions in the market price of our stock; and |
| |
6. |
integration and other risks relating to the Salem, Oregon loan production office that may cost more or be less beneficial to us than expected. |
Our management believes our forward-looking
statements are reasonable; however, you should not place undue reliance on them. Forward-looking statements are not guarantees
of performance. They involve risks, uncertainties and assumptions. Many of the factors that will determine our future results,
financial condition, and share value are beyond our ability to predict or control. We undertake no obligation to update forward-looking
statements.
The following discussion and analysis should
be read in conjunction with Pacific's audited consolidated financial statements and related notes appearing elsewhere in this report.
GENERAL
Pacific is a bank holding company providing
full-service community banking through 17 branches in Washington and three branches in Oregon operated by its wholly owned banking
subsidiary, Bank of the Pacific. In addition, Pacific has two loan production offices in Washington, one loan production office
in Oregon and a residential real estate mortgage department. The principal business of the Bank consists of making loans to and
accepting deposits from businesses and individuals. Our Bank provides full service commercial and retail banking, primarily in
its branch communities. Both our loans and our deposits are generated primarily through strong banking and community relationships,
and through management that is locally active. Our lending and investment activities are funded primarily by core deposits. This
stable source of funding is achieved by developing strong banking relationships with customers through value-added product offerings,
market pricing, convenience and high-touch service.
Our results of operations depend primarily
on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest
bearing liabilities. Noninterest income, which includes service charges and fees, gain on sale of loans, securities gains and income
from bank owned life insurance, also provides a significant contribution to our results of operations. Our principal operating
expenses, aside from interest expense, consist of salaries and employee benefits, occupancy and equipment costs, professional fees,
data processing, FDIC insurance premiums and the provision for credit losses.
EXECUTIVE OVERVIEW
The following are important factors in
understanding the Company financial condition and liquidity:
| |
· |
Total assets at December 31, 2014, increased by $39.8 million, or 5.6%, to $744.8 million compared to $705.0 million at the end of 2013. Increases in loans were the primary contributors to overall asset growth, which were partially offset by decreases in investments, interest bearing deposits in banks and loans held for sale. Total loans of $563.1 million at December 31, 2014, increased $58.4 million, or 11.6%, compared to year-end 2013. |
| |
· |
The Bank remains well capitalized with a total risk-based capital ratio of 13.52% at December 31, 2014, compared to 14.03% at December 31, 2013. Tier one leverage ratio was 9.73% at December 31, 2014, compared to 9.77% at December 31, 2013. The asset growth mentioned above outpaced the growth in retained earnings during 2014, resulting in the decline in capital ratios. The Company declared an annual cash dividend of $0.21 per share in 2014, up from $0.20 in 2013. |
| |
· |
Non-performing assets (“NPAs”) totaled $10.1 million at December 31, 2014, which represents 1.36% of total assets, versus $10.0 million, or 1.42% of total assets, at December 31, 2013. NPAs are concentrated in commercial real estate loans and related OREO, which total $7.8 million, or 76.8%, of our NPAs. |
| |
· |
Demand deposits, savings, money market and certificates of deposits less than $100,000, increased during 2014 by $32.7 million, or 6.2%, to $563.4 million and comprise 88.2% of total deposits at year-end. The increase was driven by the Bank’s second quarter 2013 acquisitions of three branches from Sterling Savings Bank (“Sterling”), in which total deposits assumed were $37,634,000 and loans acquired were $3,989,000, new deposits generated from growth in commercial banking relationships and organic deposit growth. The increase in deposits was mostly in commercial demand and money market accounts, coupled with an increase in public NOW accounts. |
The following are significant components
of the Company's results of operations for 2014 as compared to 2013.
| |
· |
Net income for 2014 was $4.9 million, or $0.48 per diluted share, compared to net income of $3.7 million, or $0.37 per diluted share, in 2013. |
| |
· |
In 2014, return on average assets (“ROAA”) and return on average equity (“ROAE”) increased to 0.68% and 6.92%, respectively, compared to 0.55% and 5.48%, respectively, in 2013. |
| |
· |
Net interest income increased to $27.0 million compared to $23.8 million in 2013. The Company experienced growth in loans during the period. Correspondingly, net interest margin for 2014 increased 17 basis points to 4.17%, as compared to 4.00% in 2013. |
| |
· |
Provision for (recapture of) credit losses was $300,000 for 2014, compared to ($450,000) for 2013. Provision expense in the current year was commensurate with growth in the loan portfolio during that same period. The recapture of provision in the prior year was primarily the result of the continued overall improvement in credit quality, as evidenced by decreases in net charge-offs, non-performing loans and performing loans classified as substandard or worse. |
| |
· |
Net charge-offs totaled $306,000 during 2014 compared to $549,000 in 2013. Loans classified as substandard or worse totaled $18.7 million at December 31, 2014, an increase of $5.9 million, compared to $12.8 million one year ago. |
| |
· |
Non-interest income decreased $1.9 million to $8.1 million for 2014,primarily due to decreases in gains on sale of loans and investment securities. Gains on sale of loans fell by $1.5 million to $3.7 million. This revenue source moderated during the latter portion of 2013 due to the slowdown in mortgage refinance activity caused by an increase in interest rates. Growth in annuity commission revenue, which increased to $464,000, from $320,000, partially offset the decrease. |
| |
· |
Non-interest expense decreased $1.3 million to $28.2 million for 2014. This decrease is primarily attributable to decreases in data processing and other conversion expenses associated with the acquisition of the three Sterling Bank branches in 2013 and a reduction in expenses associated with the holding and disposition of OREO. |
BUSINESS OVERVIEW
The Company’s financial performance
generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value
of collateral securing those loans, is highly dependent on the economy in our markets. Although economic conditions have improved,
the Company’s future operating results and financial performance may be significantly affected by a return of recessionary
economic conditions in the Company’s market area.
According to the U.S. Bureau of Labor Statistics,
the unemployment rate in Washington was 6.3% at December 31, 2014, compared to 6.6% in 2013 and 7.6% in 2012, and in Oregon the
unemployment rate was 6.7% for 2014, compared to 7.0% in 2013 and 8.4% in 2012. These rates compare to the national unemployment
rate of 5.6% at December 31, 2014. According to the Washington State Employment Security Department and the Oregon Employment Department,
unemployment rates over the last three years in the principal counties in which we operate were as follows:
| County | |
2014 | | |
2013 | | |
2012 | |
| Clark | |
| 7.2 | % | |
| 7.4 | % | |
| 8.3 | % |
| Clatsop | |
| 5.9 | % | |
| 6.1 | % | |
| 7.6 | % |
| Grays Harbor | |
| 10.6 | % | |
| 11.6 | % | |
| 12.4 | % |
| Marion | |
| 6.6 | % | |
| 7.8 | % | |
| 9.2 | % |
| Pacific | |
| 9.8 | % | |
| 10.5 | % | |
| 11.8 | % |
| Skagit | |
| 7.6 | % | |
| 8.1 | % | |
| 9.1 | % |
| Wahkiakum | |
| 9.7 | % | |
| 10.4 | % | |
| 12.2 | % |
| Whatcom | |
| 6.4 | % | |
| 6.4 | % | |
| 6.9 | % |
All Washington counties in which the Company
operates have unemployment rates greater than the state and national rates. In addition, the unemployment rate in Clatsop and Marion
Counties is below the Oregon state, but above the national rate. Overall, the unemployment rate in all our markets has steadily
improved over the last three years.
Sales activity for single-family homes
and condominiums has generally rebounded in 2014 within our geographic footprint. Year over year changes in closed sales activity
in Grays Harbor, Pacific, Skagit and Whatcom counties in Washington were 4.0%, 10.8%, -0.5%, and 7.3% (Runstad Center for Real
Estate Research – UW), respectively, during 2014. Home prices exhibited similar increases during the period. We believe the
general increase was due primarily to the gradual improvement in the local economy during 2014. Conversely, home prices declined
in Marion and Clatsop Counties in Oregon in 2014 by 6.9% and 6.5%, respectively. It appears an increased supply in active listings
during the period has resulted in a current softening of prices.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information
contained within these statements is, to a significant extent, financial information that is based on approximate measures of the
financial effects of transactions and events that have already occurred. Based on its evaluation of accounting policies that involve
the most complex and subjective decisions and assessments, management has identified the following as its most critical accounting
policies. This discussion and analysis should be read in conjunction with the Company’s financial statements and the accompanying
notes presented elsewhere herein, as well as the related discussions of each topic in this Management’s Discussion and Analysis
section above. See also “Risk Factors” under Item 1A above for a discussion of certain risks faced by the Company.
Allowance for loan losses
The Company's allowance for loan losses
methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for
loan losses that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical
loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative
factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements.
Qualitative factors include the general economic environment in the Company's markets, including economic conditions and, in particular,
the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies
and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products
and increases the complexity of its loan portfolio, it intends to enhance its methodology accordingly. A materially different amount
could be reported for the provision for credit losses in the statement of operations to change the allowance for loan losses if
management's assessment of the above factors were different.
Goodwill
Goodwill is initially recorded when the
purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired.
Goodwill is presumed to have an indefinite useful life and is tested for impairment no less than annually. The Company has one
reporting unit, the Bank, for purposes of computing goodwill. The Company performs an annual review each year or more frequently
if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. The analysis of potential impairment
of goodwill requires a two-step process. The first step is the estimation of fair value. If step one indicates that impairment
potentially exists, the second step is performed to measure the amount of impairment, if any. Goodwill impairment exists when the
estimated fair value of goodwill is less than its carrying value. The results of the Company’s annual second quarter impairment
test determined the reporting unit’s fair value exceeds its carrying value on the Company’s balance sheet and no goodwill
impairment existed. As of December 31, 2014, management determined there were no events or circumstances which would more likely
than not reduce the fair value of its reporting unit below its carrying value. No assurance can be given that the Company will
not record an impairment loss on goodwill in the future.
Investment Valuation and Other-Than-Temporary-Impairment
(“OTTI”)
The Company records investments in securities
available-for-sale at fair value and securities held-to-maturity at amortized cost. Fair value is determined based on quoted prices
for similar assets and liabilities traded in the same market; quoted prices for identical or similar instruments in markets that
are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Declines
in fair value below amortized cost are reviewed to determine if they are other than temporary. If the decline in fair value is
judged to be other than temporary, the impairment loss is separated into a credit and noncredit component. Noncredit losses are
recorded in other comprehensive income (loss) when the Company a) does not intend to sell the security or b) is not more likely
than not it will be required to sell the security prior to the security’s anticipated recovery. Credit component losses are
reported in non-interest income. The Company regularly reviews its investment portfolio to determine whether any of its securities
are other-than-temporarily impaired.
Valuation of OREO
Real estate properties acquired through
foreclosure or by deed-in-lieu of foreclosure (OREO) are recorded at fair value less estimated costs to sell. Fair value is generally
determined by management based on a number of factors, including third-party appraisals of fair value in an orderly sale. Accordingly,
the valuation of OREO is subject to significant external and internal judgment. Any differences between management's assessment
of fair value, less estimated costs to sell, and the carrying value of the loan at the date a particular property is transferred
into OREO are charged to the allowance for loan losses. Management periodically reviews OREO values to determine whether the property
continues to be carried at the lower of its recorded book value or fair value, net of estimated costs to sell. Any further decreases
in the value of OREO are considered valuation adjustments and trigger a corresponding charge to non-interest expense in the Consolidated
Statements of Income. Expenses from the maintenance and operations of OREO are included in other non-interest expense.
Income Taxes
Deferred tax assets and liabilities result
from differences between the financial statement carrying amounts and the tax basis of assets and liabilities, and are reflected
at currently enacted income taxes rates applicable to the period in which the deferred tax assets or liabilities are expected to
be realized or settled.
The Company had net deferred tax assets
(“DTAs”) of $3.2 million at December 31, 2014, compared to $4.5 million at December 31, 2013. The most significant
portions of the deductible temporary differences relate to the allowance for loan losses, supplemental executive retirement plan
and loan fees/costs. As of December 31, 2014, the Company believes that it is more likely than not that it will be able to fully
realize its DTA and therefore has not recorded a valuation allowance.
Assessing the need for, and the amount
of, a valuation allowance requires significant judgment and analysis of both positive and negative evidence regarding realization
of the DTA. The realization of the DTA is dependent upon the Company generating a sufficient level of taxable income in future
periods, which can be difficult to predict. If future taxable income should prove non-existent or less than the amount of temporary
differences giving rise to the net DTAs within the tax years to which they may be applied, the assets will not be realized and
net income will be reduced. An extended period of losses could result in the Company establishing a valuation allowance against
its DTA. The establishment of a valuation allowance would be accounted for as a charge against income and could have a material
effect on our results of operations in a particular period.
OPERATING STRATEGY
The Company’s vision is to achieve
and maintain balanced growth in loans and deposits while maintaining top peer group financial performance; to consistently exceed
all internal and external customer expectations by listening, understanding and identifying customers’ needs; to provide
timely products and services through a cost effective delivery system while maintaining customer value expectations; and positively
impacting our community through our passion and being a model corporate citizen.
In order to achieve long-term growth and
accomplish our long-term financial objectives, the Company seeks to successfully execute its long-term strategies. Operating strategies
for 2015 are as follows:
| |
· |
Grow loans and increase core deposits organically by increasing our customer base in the markets we serve and in markets adjacent to our current footprint. We will seek to capture more of each customer’s banking relationship by cross selling our loan and deposit products to our customers and emphasizing our local ownership and decision making authority. |
| |
· |
Focus on improving profitability with asset growth and reductions in net overhead and controllable operating expenses through fiscal restraint and increased emphasis on non-interest income and efficiencies. |
| |
· |
Mitigate exposure to increasing interest rates. The majority of our loans are relatively short term in nature with interest rates tied to a market index such as the prime rate. The substantial majority of the fixed rate residential mortgage loans we originate are sold in the secondary market which reduces the interest rate and credit risk associated with fixed rate residential lending. The investment portfolio is made up of fixed and adjustable rate securities with durations less than five years. |
| |
· |
Continue to improve asset quality through proactive management of problem loans, monitoring of existing performing loans, and selling of OREO properties. |
| |
· |
Successfully expand on the opportunities available to garner additional profitable banking relationships through our branches and loan production offices in Skagit, Thurston and Clark Counties due to continued merger-related market disruption in these markets. We will also look to grow our banking relationships in Oregon, capitalizing on our branch acquisition Sterling, newly opened branch in Warrenton, and opening of a loan production office in Salem. |
The degree to which we will be able to
execute on these strategies will depend to a large degree on the local and national economy, improvement in the local markets for
residential real estate, limited deterioration in the credit quality of our commercial real estate loans, and satisfaction of all
conditions to our current expansion initiatives, including receipt of any required regulatory approvals.
CONSOLIDATED RESULTS OF OPERATIONS
Years ended December 31, 2014, 2013, and
2012
General. The following
table presents condensed consolidated statements of income for the Company for each of the years in the three-year period ended
December 31, 2014.
| | |
| | |
| | |
2014 to 2013 | | |
| | |
2013 to 2012 | |
| | |
For the Twelve
Months Ended
December 31, 2014 | | |
For the Twelve
Months Ended
December 31, 2013 | | |
$
Change | | |
%
Change | | |
For the Twelve
Months Ended
December 31, 2012 | | |
$
Change | | |
%
Change | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Interest and dividend income | |
$ | 29,158 | | |
$ | 26,290 | | |
$ | 2,868 | | |
| 11 | % | |
$ | 27,495 | | |
$ | (1,205 | ) | |
| -4 | % |
| Interest expense | |
| 2,125 | | |
| 2,490 | | |
| (365 | ) | |
| -15 | % | |
| 3,484 | | |
| (994 | ) | |
| -29 | % |
| Net interest income | |
| 27,033 | | |
| 23,800 | | |
| 3,233 | | |
| 14 | % | |
| 24,011 | | |
| (211 | ) | |
| -1 | % |
| Loan loss provision | |
| 300 | | |
| (450 | ) | |
| 750 | | |
| -167 | % | |
| (1,100 | ) | |
| 650 | | |
| -59 | % |
| Non-interest income | |
| 8,079 | | |
| 9,955 | | |
| (1,876 | ) | |
| -19 | % | |
| 9,391 | | |
| 564 | | |
| 6 | % |
| Non-interest expense | |
| 28,155 | | |
| 29,502 | | |
| (1,347 | ) | |
| -5 | % | |
| 28,417 | | |
| 1,085 | | |
| 4 | % |
| INCOME BEFORE PROVISION FOR INCOME TAXES | |
| 6,657 | | |
| 4,703 | | |
| 1,954 | | |
| 42 | % | |
| 6,085 | | |
| (1,382 | ) | |
| -23 | % |
| PROVISION FOR INCOME
TAXES | |
| 1,730 | | |
| 972 | | |
| 758 | | |
| 78 | % | |
| 1,300 | | |
| (328 | ) | |
| -25 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| NET
INCOME | |
$ | 4,927 | | |
$ | 3,731 | | |
$ | 1,196 | | |
| 32 | % | |
$ | 4,785 | | |
$ | (1,054 | ) | |
| -22 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| INCOME PER COMMON SHARE: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| BASIC (1) | |
$ | 0.48 | | |
$ | 0.37 | | |
$ | 0.11 | | |
| 30 | % | |
$ | 0.47 | | |
$ | (0.10 | ) | |
| -21 | % |
| DILUTED (2) | |
$ | 0.48 | | |
$ | 0.37 | | |
$ | 0.11 | | |
| 30 | % | |
$ | 0.47 | | |
$ | (0.10 | ) | |
| -21 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Average common shares outstanding - basic (1) | |
| 10,256,242 | | |
| 10,121,738 | | |
| 134,504 | | |
| 1 | % | |
| 10,121,853 | | |
| (115 | ) | |
| 0 | % |
| Average common shares outstanding - diluted (2) | |
| 10,347,338 | | |
| 10,189,888 | | |
| 157,450 | | |
| 2 | % | |
| 10,126,244 | | |
| 63,644 | | |
| 1 | % |
Net income. For the
year ended December 31, 2014, net income was $4.9 million compared to $3.7 million in 2013. The increase in net income for 2014
was primarily related to increases in net interest income due to growth in loans and a reduction in interest expense paid on deposits.
The decline in data processing and other conversion expenses relates to expenses associated with the acquisition of three Sterling
branches in 2013 and a reduction in expenses associated with the disposition of OREO. These expense reductions were partially offset
by a decline in gain on sale of loans due to the slowdown in mortgage refinance activity caused by an increase in interest rates
beginning in the latter half of 2013.
Net income of $3.7 million for 2013 was
down from net income of $4.8 million for the year ended December 31, 2012. This was primarily due to an increase in noninterest
expenses associated with the expansion of loan production offices and integration of the branches purchased from Sterling. This
was offset partially by an increase in non-interest income from gain on sale of loans, ATM/Debit card and annuity commission fee
income. Net income in 2013 was also impacted by a reduction in recapture of provision for loan losses as compared to the prior
period.
Net Interest Income. The Company derives
the majority of its earnings from net interest income, which is the difference between interest income earned on interest earning
assets and interest expense incurred on interest bearing liabilities. The Company's net interest income is affected by the change
in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. The Company's
net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate
changes. Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for
lending purposes and competitive factors. Those factors are, in turn, affected by general economic conditions and other factors
beyond the Company's control, such as federal economic policies, legislative tax policies and actions by the Federal Open Market
Committee of the Federal Reserve (“FOMC”). Interest rates on deposits are affected primarily by rates charged by competitors
and actions by the FOMC.
The FOMC heavily influences market interest
rates, including deposit and loan rates offered by many financial institutions. Also, as rates near zero, it becomes more difficult
to match decreases in rates on interest earning assets with decreases in rates paid on interest bearing liabilities. Approximately
70% of the Company's loan portfolio is tied to short-term rates, and therefore, re-price when interest rate changes occur. The
Company's funding sources also re-price when rates change; however, there is a meaningful lag in the timing of the re-pricing of
deposits as compared to loans and decreases in interest rates become less easily matched by decreases in deposit rates as rates
approach zero. Because of its focus on commercial lending, the Company will continue to have a high percentage of floating rate
loans. Because deposit rates are near the bottom, and because the reinvestment rates on maturing securities have fallen dramatically
and loan rates are impacted by competition for new loans, the Company anticipates that the prolonged low rate environment will
continue to impact net interest margin in 2015.
The following tables set forth information with regard to average
balances of interest earning assets and interest bearing liabilities and the resultant yields or cost, net interest income, and
the net interest margin on a tax equivalent basis. Non-accrual loans are included in gross loans.
| Average
Interest Earning Balances: | |
For
the Twelve Months Ended | |
| | |
December
31, 2014 | | |
December
31, 2013 | | |
December
31, 2012 | |
| | |
Average Balance | | |
Interest Income or Expense | | |
Average Yields or Rates | | |
Average Balance | | |
Interest Income or Expense | | |
Average Yields or Rates | | |
Average Balance | | |
Interest Income or Expense | | |
Average Yields or Rates | |
| (Dollars in Thousands) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| ASSETS: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest bearing certificate
of deposit | |
$ | 2,727 | | |
$ | 42 | | |
| 1.54 | % | |
$ | 2,309 | | |
$ | 29 | | |
| 1.26 | % | |
$ | 2,985 | | |
$ | 12 | | |
| 0.40 | % |
| Interest bearing deposits in banks | |
| 20,326 | | |
| 47 | | |
| 0.23 | % | |
| 36,539 | | |
| 85 | | |
| 0.23 | % | |
| 29,104 | | |
| 72 | | |
| 0.25 | % |
| Investments - taxable | |
| 63,312 | | |
| 1,269 | | |
| 2.00 | % | |
| 53,505 | | |
| 778 | | |
| 1.45 | % | |
| 29,993 | | |
| 770 | | |
| 2.57 | % |
| Investments - nontaxable | |
| 29,514 | | |
| 1,258 | | |
| 4.26 | % | |
| 32,650 | | |
| 1,508 | | |
| 4.62 | % | |
| 27,590 | | |
| 1,525 | | |
| 5.53 | % |
| Federal home loan bank stock | |
| 2,962 | | |
| 3 | | |
| 0.10 | % | |
| 3,078 | | |
| 2 | | |
| 0.06 | % | |
| 3,173 | | |
| - | | |
| 0.00 | % |
| Pacific coast bankers bank stock | |
| 266 | | |
| 30 | | |
| 11.28 | % | |
| - | | |
| - | | |
| 0.00 | % | |
| - | | |
| - | | |
| 0.00 | % |
| Gross loans (1) | |
| 536,971 | | |
| 26,871 | | |
| 5.00 | % | |
| 477,356 | | |
| 24,302 | | |
| 5.09 | % | |
| 466,943 | | |
| 25,461 | | |
| 5.45 | % |
| Loans held for sale | |
| 7,026 | | |
| 255 | | |
| 3.63 | % | |
| 9,302 | | |
| 312 | | |
| 3.35 | % | |
| 12,950 | | |
| 492 | | |
| 3.80 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Deferred fees | |
| (1,123 | ) | |
| - | | |
| 0.00 | % | |
| (1,034 | ) | |
| - | | |
| 0.00 | % | |
| (857 | ) | |
| - | | |
| 0.00 | % |
| Total interest earning
assets | |
| 661,981 | | |
| 29,775 | | |
| 4.50 | % | |
| 613,705 | | |
| 27,016 | | |
| 4.40 | % | |
| 571,881 | | |
| 28,332 | | |
| 4.95 | % |
| Cash and due from banks | |
| 13,201 | | |
| | | |
| | | |
| 11,637 | | |
| | | |
| | | |
| 10,751 | | |
| | | |
| | |
| Bank premises and equipment (net) | |
| 16,633 | | |
| | | |
| | | |
| 15,831 | | |
| | | |
| | | |
| 14,753 | | |
| | | |
| | |
| Other real estate owned | |
| 1,658 | | |
| | | |
| | | |
| 4,030 | | |
| | | |
| | | |
| 6,880 | | |
| | | |
| | |
| Allowance for loan losses | |
| (8,327 | ) | |
| | | |
| | | |
| (9,065 | ) | |
| | | |
| | | |
| (11,022 | ) | |
| | | |
| | |
| Other assets | |
| 40,679 | | |
| | | |
| | | |
| 40,908 | | |
| | | |
| | | |
| 42,427 | | |
| | | |
| | |
| Total
assets | |
$ | 725,825 | | |
| | | |
| | | |
$ | 677,046 | | |
| | | |
| | | |
$ | 635,670 | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| LIABILITIES AND SHAREHOLDERS'
EQUITY: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest-bearing deposits | |
$ | 344,084 | | |
| 581 | | |
| 0.17 | % | |
| 316,184 | | |
| 699 | | |
| 0.22 | % | |
| 288,984 | | |
| 1,084 | | |
| 0.38 | % |
| Time deposits | |
| 122,002 | | |
| 1,087 | | |
| 0.89 | % | |
| 135,447 | | |
| 1,321 | | |
| 0.98 | % | |
| 144,486 | | |
| 1,798 | | |
| 1.24 | % |
| Long term borrowings | |
| 10,591 | | |
| 215 | | |
| 2.03 | % | |
| 9,745 | | |
| 214 | | |
| 2.20 | % | |
| 7,803 | | |
| 217 | | |
| 2.78 | % |
| Short term borrowings | |
| 150 | | |
| 1 | | |
| 0.67 | % | |
| 304 | | |
| 9 | | |
| 0.00 | % | |
| 2,697 | | |
| 79 | | |
| 2.93 | % |
| Secured borrowings | |
| - | | |
| - | | |
| 0.00 | % | |
| - | | |
| - | | |
| 0.00 | % | |
| 448 | | |
| 20 | | |
| 4.46 | % |
| Junior subordinated
debentures | |
| 13,403 | | |
| 241 | | |
| 1.80 | % | |
| 13,403 | | |
| 247 | | |
| 1.84 | % | |
| 13,403 | | |
| 286 | | |
| 2.13 | % |
| Total interest bearing
liabilities | |
| 490,230 | | |
| 2,125 | | |
| 0.43 | % | |
| 475,083 | | |
| 2,490 | | |
| 0.52 | % | |
| 457,821 | | |
| 3,484 | | |
| 0.76 | % |
| Non-interest-bearing deposits | |
| 158,697 | | |
| | | |
| | | |
| 129,218 | | |
| | | |
| | | |
| 107,048 | | |
| | | |
| | |
| Other liabilities | |
| 5,710 | | |
| | | |
| | | |
| 4,688 | | |
| | | |
| | | |
| 5,058 | | |
| | | |
| | |
| Equity | |
| 71,188 | | |
| | | |
| | | |
| 68,057 | | |
| | | |
| | | |
| 65,743 | | |
| | | |
| | |
| Total
liabilities and shareholders' equity | |
$ | 725,825 | | |
| | | |
| | | |
$ | 677,046 | | |
| | | |
| | | |
$ | 635,670 | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net
interest income (3) | |
| | | |
$ | 27,650 | | |
| | | |
| | | |
$ | 24,526 | | |
| | | |
| | | |
$ | 24,848 | | |
| | |
| Net interest spread | |
| | | |
| | | |
| 4.07 | % | |
| | | |
| | | |
| 3.88 | % | |
| | | |
| | | |
| 4.19 | % |
| Average yield on investments | |
| | | |
| | | |
| 2.72 | % | |
| | | |
| | | |
| 2.65 | % | |
| | | |
| | | |
| 3.99 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Average yield on earning assets (2) (3) | |
| | | |
| | | |
| 4.50 | % | |
| | | |
| | | |
| 4.40 | % | |
| | | |
| | | |
| 4.95 | % |
| Interest expense to
earning assets | |
| | | |
| | | |
| 0.33 | % | |
| | | |
| | | |
| 0.42 | % | |
| | | |
| | | |
| 0.61 | % |
| Net interest income to earning assets (2)
(3) | |
| | | |
| | | |
| 4.18 | % | |
| | | |
| | | |
| 4.00 | % | |
| | | |
| | | |
| 4.34 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Reconciliation of Non-GAAP measure: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Tax Equivalent Net Interest
Income | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net interest income | |
| | | |
$ | 27,033 | | |
| | | |
| | | |
$ | 23,800 | | |
| | | |
| | | |
$ | 24,011 | | |
| | |
| Tax equivalent adjustment for municipal loan
interest | |
| | | |
| 189 | | |
| | | |
| | | |
| 213 | | |
| | | |
| | | |
| 318 | | |
| | |
| Tax equivalent adjustment
for municipal bond interest | |
| | | |
| 428 | | |
| | | |
| | | |
| 513 | | |
| | | |
| | | |
| 519 | | |
| | |
| Tax equivalent net
interest income | |
| | | |
$ | 27,650 | | |
| | | |
| | | |
$ | 24,526 | | |
| | | |
| | | |
$ | 24,848 | | |
| | |
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.
Management believes that presentation of this non-GAAP measure provides useful information frequently used by shareholders in the evaluation of a company.
Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.
(1) Non-accrual loans of approximately $8.7 million at 12/31/14, $7.2 million for 12/31/13, and $15.1 million for 12/31/2012 are included in the average loan balances.
(2) Loan interest income includes loan fee income of $679,000, $547,000, and $569,000 for the twelve months ended 12/31/2014, 12/31/2013, and 12/31/12, respectively.
(3) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% effective rate. The amount of such adjustment was an addition to recorded pre-tax income of $617,000, $726,000, $837,000 for the twelve months ended December 31, 2014, 2013, and 2012, respectively.
Net interest income for the twelve months
ended December 31, 2014 increased from the twelve months ended December 31, 2013. This increase was primarily due to the growth
in earning assets, along with changes in the balance sheet mix. Loan balances increased due to the production generated predominately
in our Washington and Oregon markets. Investment securities and interest bearing deposits in banks decreased as a proportion of
the balance sheet, due to the strong loan demand during the current year. Funding costs have declined over the year due to the
shift in mix toward non-interest bearing demand and lower-cost deposits, and continued historically low interest rates.
As a result, net interest margin improved
for the year ended December 31, 2014 as compared to the prior year, primarily due to the improvement in the yield on earning assets
and a decline in the cost of liabilities. This was because higher-yielding loans increased as a proportion of earning assets during
2014. The improvement in yields on investment securities also enhanced net interest margin for the twelve months ending December
31, 2014 as compared to the same period in 2013. This was primarily the result of redeploying lower yielding cash-equivalents into
higher-yielding federal government guaranteed mortgage-backed securities.
In addition, a decline in the rate paid
for interest-bearing liabilities and an increase of the proportion of funding coming from non-interest bearing deposits contributed
to a decline in the cost of liabilities, thus resulting in an improvement of net interest margin in 2014 as compared to 2013.
Net interest income for the twelve months
ended December 31, 2013 decreased from the twelve months ended December 31, 2012. While the Company generated an increase in the
volume of both loans and investment securities, the yields earned on these assets declined as compared to 2012. Competitive demand
for credit worthy borrowers, along with Federal Reserve Bank’s continued effort to keep interest rates low, negatively impact
yields during the period. This was partially offset by an improvement in funding costs, a change in the mix of deposits with a
greater concentration in demand and savings accounts than higher cost certificates of deposits.
As a result, net interest margin declined
for the year ended December 31, 2013 as compared to the prior year, primarily due to the decrease in the yield on earning assets,
despite the decline in the cost of liabilities. This was because lower-yielding investment securities increased as a proportion
of earning assets during 2013. The additional deposits obtained via the purchase of three branches from Sterling Savings Bank in
June 2013 were deployed directly into investment securities initially and then used to fund loan growth over time.
The following table presents changes in
net interest income, on a tax-equivalent basis, attributable to changes in volume or rate. Changes not solely due to volume or
rate are allocated to volume and rate based on the absolute values of each.
| | |
For the Twelve Months Ended | | |
For the Twelve Months Ended | |
| | |
December 31, 2014 vs. December 31, 2013 | | |
December 31, 2013 vs. December 31, 2012 | |
| | |
Increase (Decrease) Due To | | |
Increase (Decrease) Due To | |
| (Dollars in Thousands) | |
| | |
| | |
Net | | |
| | |
| | |
Net | |
| | |
Volume | | |
Rate | | |
Change | | |
Volume | | |
Rate | | |
Change | |
| ASSETS: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest bearing certificate of deposit | |
$ | 5 | | |
$ | 8 | | |
$ | 13 | | |
$ | (3 | ) | |
$ | 20 | | |
$ | 17 | |
| Interest bearing deposits in banks | |
| (37 | ) | |
| (1 | ) | |
| (38 | ) | |
| 19 | | |
| (6 | ) | |
| 13 | |
| Investments - taxable | |
| 142 | | |
| 349 | | |
| 491 | | |
| 604 | | |
| (596 | ) | |
| 8 | |
| Investments - nontaxable | |
| (145 | ) | |
| (105 | ) | |
| (250 | ) | |
| 280 | | |
| (297 | ) | |
| (17 | ) |
| Federal home loan bank stock | |
| - | | |
| 1 | | |
| 1 | | |
| - | | |
| - | | |
| - | |
| Pacific coast bankers bank stock | |
| - | | |
| 30 | | |
| 30 | | |
| - | | |
| - | | |
| - | |
| Gross loans (1) | |
| 3,034 | | |
| (465 | ) | |
| 2,569 | | |
| 568 | | |
| (1,727 | ) | |
| (1,159 | ) |
| Loans held for sale | |
| (76 | ) | |
| 19 | | |
| (57 | ) | |
| (139 | ) | |
| (41 | ) | |
| (180 | ) |
| Deferred fees | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Total interest earning assets | |
$ | 2,923 | | |
$ | (164 | ) | |
$ | 2,759 | | |
$ | 1,329 | | |
$ | (2,647 | ) | |
$ | (1,318 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| LIABILITIES AND SHAREHOLDERS' EQUITY: | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest-bearing deposits | |
$ | 61 | | |
$ | (179 | ) | |
$ | (118 | ) | |
$ | 103 | | |
$ | (488 | ) | |
$ | (385 | ) |
| Time deposits | |
| (132 | ) | |
| (102 | ) | |
| (234 | ) | |
| (112 | ) | |
| (365 | ) | |
| (477 | ) |
| Long term borrowings | |
| 19 | | |
| (18 | ) | |
| 1 | | |
| 54 | | |
| (57 | ) | |
| (3 | ) |
| Short term borrowings | |
| - | | |
| (8 | ) | |
| (8 | ) | |
| (70 | ) | |
| - | | |
| (70 | ) |
| Secured borrowings | |
| - | | |
| - | | |
| - | | |
| (20 | ) | |
| - | | |
| (20 | ) |
| Junior subordinated debentures | |
| - | | |
| (6 | ) | |
| (6 | ) | |
| - | | |
| (39 | ) | |
| (39 | ) |
| Total interest bearing liabilities (increase) decrease | |
| (52 | ) | |
| (313 | ) | |
| (365 | ) | |
| (45 | ) | |
| (949 | ) | |
| (994 | ) |
| Net increase (decrease) in net interest income | |
$ | 2,975 | | |
$ | 149 | | |
$ | 3,124 | | |
$ | 1,374 | | |
$ | (1,698 | ) | |
$ | (324 | ) |
Non-Interest Income.
Noninterest income for 2014 was down from 2013, reflecting the declines in gains on sale of residential mortgage loans due to the
reduction in refinancing activity beginning in the latter half of 2013, declines in gains on sale of securities and higher losses
on sale of OREO due to a more aggressive approach to reducing these assets. This was partially offset by an increase in annuity
commission fee income.
Non-interest income was up in 2013 as compared
to 2012. Categories contributing to this were increases in service charges on deposits and ATM/debit card fee income due to growth
in core deposits, primarily from the acquisition of the Sterling Savings Bank branches. Also contributing were growth in annuity
commission fee income as more employees became licensed to offer these products and a reduction in OTTI losses due to a reduction
in the securities incurring such write-downs. This was partially offset by a decrease in gain on sale of OREO as a result of a
declining volume of such properties.
The following table represents the principal
categories of non-interest income for each of the years in the three-year period ended December 31, 2014.
| For The Twelve Months Ended | |
| | |
| | |
2014 to 2013 | | |
| | |
2013 to 2012 | |
| | |
December
31, 2014 | | |
December
31, 2013 | | |
$ Change | | |
% Change | | |
December
31, 2012 | | |
$ Change | | |
% Change | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Service charges on deposit accounts | |
$ | 1,809 | | |
$ | 1,731 | | |
$ | 78 | | |
| 5 | % | |
$ | 1,686 | | |
$ | 45 | | |
| 3 | % |
| Net gain (loss) on sale of other real estate owned | |
| (207 | ) | |
| 40 | | |
| (247 | ) | |
| -618 | % | |
| 331 | | |
| (291 | ) | |
| -88 | % |
| Net gains from sales of loans | |
| 3,686 | | |
| 5,171 | | |
| (1,485 | ) | |
| -29 | % | |
| 5,058 | | |
| 113 | | |
| 2 | % |
| Net gains on sales of securities available for sale | |
| 88 | | |
| 405 | | |
| (317 | ) | |
| -78 | % | |
| 303 | | |
| 102 | | |
| 34 | % |
| Net other-than-temporary impairment | |
| (48 | ) | |
| (37 | ) | |
| (11 | ) | |
| 30 | % | |
| (333 | ) | |
| 296 | | |
| -89 | % |
| Earnings on bank owned life insurance | |
| 505 | | |
| 452 | | |
| 53 | | |
| 12 | % | |
| 510 | | |
| (58 | ) | |
| -11 | % |
| Other operating income | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Fee income | |
| 1,709 | | |
| 1,811 | | |
| (102 | ) | |
| -6 | % | |
| 1,673 | | |
| 138 | | |
| 8 | % |
| Annuity sales income | |
| 464 | | |
| 320 | | |
| 144 | | |
| 45 | % | |
| 17 | | |
| 303 | | |
| 1782 | % |
| Other non-interest income | |
| 73 | | |
| 62 | | |
| 11 | | |
| 18 | % | |
| 146 | | |
| (84 | ) | |
| -58 | % |
| Total non-interest income | |
$ | 8,079 | | |
$ | 9,955 | | |
$ | (1,876 | ) | |
| -19 | % | |
$ | 9,391 | | |
$ | 564 | | |
| 6 | % |
Non-Interest Expense.
Noninterest expense for 2014 was down as compared to 2013. Increases in personnel expense related to the addition of loan production
personnel and branch staff for a new branch that opened in the fourth quarter of 2013 were partially offset by $471,000 savings
generated from reduction in mortgage lending staff initiated in first quarter 2014 prompted by the decline in residential mortgage
loan refinance activity. Total costs associated with OREO and related third-party loan expenses decreased due to the decline in
OREO balances and stabilization of collateral valuations. Also, data processing and other conversion expenses totaling $615,000
related to the acquisition of three branches from Sterling in 2013 did not recur in 2014.
Total non-interest expense in 2013 was
up compared to 2012. Contributing to this increase were costs associated with acquisition and operation of the three branches acquired
from Sterling, as previously noted. The increase in salary and benefits costs in 2013 is largely attributable to increases in commissions
paid on the sale of loans held for sale as part of increased residential mortgage loan production during the first part of the
year, and increases in loan production personnel which tend to be more highly compensated. The effect of these increases was partially
mitigated by decreases in FDIC insurance assessments, expenses related to OREO and other related costs.
The following table shows the principal
categories of non-interest expense for each of the years in the three-year period ended December 31, 2014.
| For The Twelve Months Ended | |
| | |
| | |
2014 to 2013 | | |
| | |
2013 to 2012 | |
| | |
December
31, 2014 | | |
December
31, 2013 | | |
$ Change | | |
% Change | | |
December
31, 2012 | | |
$ Change | | |
% Change | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Salaries and employee benefits | |
$ | 17,118 | | |
$ | 17,013 | | |
$ | 105 | | |
| 1 | % | |
$ | 16,215 | | |
$ | 798 | | |
| 5 | % |
| Occupancy | |
| 2,006 | | |
| 1,839 | | |
| 167 | | |
| 9 | % | |
| 1,673 | | |
| 166 | | |
| 10 | % |
| Equipment | |
| 1,050 | | |
| 860 | | |
| 190 | | |
| 22 | % | |
| 801 | | |
| 59 | | |
| 7 | % |
| Data processing | |
| 2,009 | | |
| 2,268 | | |
| (259 | ) | |
| -11 | % | |
| 1,607 | | |
| 661 | | |
| 41 | % |
| Professional services | |
| 745 | | |
| 935 | | |
| (190 | ) | |
| -20 | % | |
| 750 | | |
| 185 | | |
| 25 | % |
| Other real estate owned write-downs | |
| 67 | | |
| 946 | | |
| (879 | ) | |
| -93 | % | |
| 1,314 | | |
| (368 | ) | |
| -28 | % |
| Other real estate owned operating costs | |
| 238 | | |
| 408 | | |
| (170 | ) | |
| -42 | % | |
| 550 | | |
| (142 | ) | |
| -26 | % |
| State taxes | |
| 417 | | |
| 458 | | |
| (41 | ) | |
| -9 | % | |
| 518 | | |
| (60 | ) | |
| -12 | % |
| FDIC and state assessments | |
| 491 | | |
| 535 | | |
| (44 | ) | |
| -8 | % | |
| 610 | | |
| (75 | ) | |
| -12 | % |
| Other non-interest expense: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Director fees | |
| 287 | | |
| 224 | | |
| 63 | | |
| 28 | % | |
| 236 | | |
| (12 | ) | |
| -5 | % |
| Communication | |
| 209 | | |
| 172 | | |
| 37 | | |
| 22 | % | |
| 170 | | |
| 2 | | |
| 1 | % |
| Advertising | |
| 331 | | |
| 316 | | |
| 15 | | |
| 5 | % | |
| 366 | | |
| (50 | ) | |
| -14 | % |
| Professional liability insurance | |
| 85 | | |
| 90 | | |
| (5 | ) | |
| -6 | % | |
| 113 | | |
| (23 | ) | |
| -20 | % |
| Amortization | |
| 385 | | |
| 415 | | |
| (30 | ) | |
| -7 | % | |
| 381 | | |
| 34 | | |
| 9 | % |
| Other non-interest expense | |
| 2,717 | | |
| 3,023 | | |
| (306 | ) | |
| -10 | % | |
| 3,113 | | |
| (90 | ) | |
| -3 | % |
| Total non-interest expense | |
$ | 28,155 | | |
$ | 29,502 | | |
$ | (1,347 | ) | |
| -5 | % | |
$ | 28,417 | | |
$ | 1,085 | | |
| 4 | % |
Income Taxes. For
the years ended December 31, 2014, 2013 and 2012 income taxes totaled $1.7 million, $972,000 and $1.3 million, respectively, representing
effective tax rates of 26.0%, 20.7% and 21.4%, respectively. The effective tax rate differs from the statutory rate of 34.6% due
to tax exempt income from investments in municipal securities and loans, income earned on BOLI, and tax credits received on investments
in low income housing partnerships.
Deferred income tax assets or liabilities
reflect the estimated future tax effects attributable to differences as to when certain items of income or expense are reported
in the financial statements versus when they are reported in the tax returns. At December 31, 2014 and 2013, the Company had a
net deferred tax asset of $3.2 million and $4.5 million, respectively.
See “Critical Accounting Policies”
in this section above.
FINANCIAL CONDITION
At December 31, 2014 and 2013
Cash and Cash Equivalents
Total cash and cash equivalents, including
interest bearing deposits in banks, decreased to $33,764,000 at December 31, 2014, from $38,675,000 at December 31, 2013, due to
increased lending through new loan production offices.
Investment Portfolio
The composition of our investment portfolio
is managed to maximize total return on the portfolio while considering the impact it has on asset/liability position and liquidity
needs. The majority of securities are classified as available-for-sale and carried at fair value with a small amount classified
as held-to-maturity and carried at amortized cost. The Company regularly reviews its portfolio in conjunction with overall balance
sheet management strategies. From time to time securities may be sold to reposition the portfolio in response to strategies developed
by the Company’s asset liability committee or to realize gains within the portfolio. The Company’s investment securities
portfolio decreased $9,007,000, or 9.2%, during 2014 to $89,269,000 as funds were redeployed to support loan growth during the
period. The Company's investment securities portfolio increased $30,232,000, or 44.4%, during 2013 to $98,276,000 due to investment
in municipal, government agency and mortgage-backed securities.
The Company regularly reviews its investment
portfolio to determine whether any of its securities are other than temporarily impaired. In addition to accounting and regulatory
guidance, in determining whether a security is other than temporarily impaired, the Company considers whether it intends to sell
the security and if it does not intend to sell the security, whether it is more likely than not it will be required to sell the
security before recovery of its amortized cost basis. The Company also considers cash flow analysis for mortgage-backed securities
under various prepayment, default, and loss severity scenarios in determining whether a mortgage-backed security is other than
temporarily impaired. At December 31, 2014, the Company owned 38 securities in a continuous unrealized loss position for twelve
months or longer, with an amortized cost of $31,748,000 and fair value of $31,195,000. These securities that have been in a continuous
unrealized loss position for twelve months or longer at December 31, 2014, had investment grade ratings upon purchase. Following
its evaluation of factors deemed relevant, management determined, in part because the Company does not have the intent to sell
these securities and it is not more likely than not that it will have to sell the securities before recovery of cost basis, which
may be at maturity, the Company does not have any other than temporarily impaired securities at December 31, 2014. For more information
regarding our investment securities and analysis of the value of securities in our investment portfolio, see Note 3 - "Securities"
and Note 17 – "Fair Value Measurements" to the Company's audited consolidated financial statements included in
Item 15 of this report. See also “Critical Accounting Policies” in this section above.
The carrying values of investment securities
at December 31 in each of the last three years are as follows:
| (Dollars in Thousands) | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| | |
2014 | | |
2013 | | |
2012 | |
| Available-for-sale: | |
| | | |
| | | |
| | |
| Collateralized mortgage obligations: agency issued | |
$ | 38,767 | | |
$ | 38,791 | | |
$ | 17,066 | |
| Collateralized mortgage obligations: non agency | |
| 527 | | |
| 2,011 | | |
| 2,544 | |
| Mortgage-backed securities: agency issued | |
| 12,199 | | |
| 13,389 | | |
| 5,093 | |
| U.S. Government agency securities | |
| 8,056 | | |
| 8,811 | | |
| 5,952 | |
| State and municipal securities | |
| 27,891 | | |
| 32,160 | | |
| 26,906 | |
| Corporate bonds | |
| - | | |
| 982 | | |
| 3,545 | |
| Total available-for-sale | |
$ | 87,440 | | |
$ | 96,144 | | |
$ | 61,106 | |
| | |
| | | |
| | | |
| | |
| Held-to-maturity: | |
| | | |
| | | |
| | |
| Mortgage-backed securities: agency issued | |
$ | 123 | | |
$ | 159 | | |
$ | 221 | |
| State and municipal securities | |
| 1,706 | | |
| 1,973 | | |
| 6,716 | |
| Total held-to-maturity | |
$ | 1,829 | | |
$ | 2,132 | | |
$ | 6,937 | |
| | |
| | | |
| | | |
| | |
| Total investments | |
$ | 89,269 | | |
$ | 98,276 | | |
$ | 68,043 | |
The following table presents the maturities
of investment securities at December 31, 2014.
| At December 31, 2014 | |
| | |
| |
| (Dollars in Thousands) | |
| | |
| |
| | |
| | |
| |
| | |
Held-to-maturity | | |
Available-for-sale | |
| | |
Amortized | | |
| | |
Amortized | | |
| |
| | |
Cost | | |
Fair Value | | |
Cost | | |
Fair Value | |
| | |
| | |
| | |
| | |
| |
| Due in one year or less | |
$ | - | | |
$ | - | | |
$ | 325 | | |
$ | 329 | |
| Due after one year through five years | |
| - | | |
| - | | |
| 8,636 | | |
| 8,662 | |
| Due after five years through ten years | |
| 889 | | |
| 899 | | |
| 12,903 | | |
| 13,160 | |
| Due after ten years | |
| 817 | | |
| 818 | | |
| 13,234 | | |
| 13,796 | |
| Declining Balance Securities | |
| 123 | | |
| 135 | | |
| 51,809 | | |
| 51,493 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total investment securities | |
$ | 1,829 | | |
$ | 1,852 | | |
$ | 86,907 | | |
$ | 87,440 | |
Loan Portfolio
General. Total
loans at December 31, 2014 were up as compared to December 31, 2013 and 2012. The increase in total loans was driven primarily
by growth in several loan categories, notably commercial and agricultural, multi-family, commercial real estate and consumer loans.
While competition for commercial loans in the markets we serve is strong, loan demand is beginning to grow. In addition, recent
merger and acquisition activity in our market area by larger institutions has enabled the Bank to acquire commercial relationships
that desire to deal with a local community bank. Management expects the loan portfolio will continue to grow in 2015, although
it believes the uncertainty surrounding various aspects of the economy is causing many customers to wait for even more clarity
before borrowing additional funds to expand their businesses or purchase assets.
The following table sets forth the composition
of the Company's loan portfolio at December 31 in each of the past five years.
Loans as of December 31, 2014, 2013, 2012, 2011 and
2010 consisted of the following:
| (Dollars in Thousands) | |
December
31, 2014 | | |
December
31, 2013 | | |
December
31, 2012 | | |
December
31, 2011 | | |
December
31, 2010 | |
| | |
| | |
| | |
| | |
| | |
| |
| Commercial and agricultural | |
$ | 120,517 | | |
$ | 104,111 | | |
$ | 87,278 | | |
$ | 90,731 | | |
$ | 84,575 | |
| Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Construction and development | |
| 26,711 | | |
| 29,096 | | |
| 31,411 | | |
| 47,156 | | |
| 46,256 | |
| Residential 1-4 family | |
| 92,965 | | |
| 87,762 | | |
| 77,497 | | |
| 76,011 | | |
| 79,068 | |
| Multi-family | |
| 18,541 | | |
| 17,520 | | |
| 7,744 | | |
| 7,682 | | |
| 9,113 | |
| Commercial real estate -- owner occupied | |
| 125,632 | | |
| 105,594 | | |
| 109,783 | | |
| 118,469 | | |
| 109,936 | |
| Commercial real estate -- non owner occupied | |
| 117,137 | | |
| 117,294 | | |
| 103,014 | | |
| 103,005 | | |
| 106,079 | |
| Farmland | |
| 22,245 | | |
| 23,698 | | |
| 24,544 | | |
| 23,752 | | |
| 22,354 | |
| Consumer | |
| 40,565 | | |
| 20,728 | | |
| 7,782 | | |
| 8,928 | | |
| 9,128 | |
| Gross loans | |
| 564,313 | | |
| 505,803 | | |
| 449,053 | | |
| 475,734 | | |
| 466,509 | |
| Less: deferred fees | |
| (1,214 | ) | |
| (1,137 | ) | |
| (857 | ) | |
| (841 | ) | |
| (828 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Portfolio Loans | |
$ | 563,099 | | |
$ | 504,666 | | |
$ | 448,196 | | |
$ | 474,893 | | |
$ | 465,681 | |
The Company's strategy is to originate
loans primarily in its local markets. Depending on the purpose of a loan, loans may be secured by a variety of collateral, including
real estate, business assets, and personal assets. The majority of the Company's loan portfolio is comprised of commercial and
agricultural loans (commercial loans) and real estate loans. The commercial and agricultural loans are a diverse group of loans
to small, medium, and large businesses for purposes ranging from working capital needs to term financing of equipment. In addition,
the loan portfolio contains $30.8 million and $11.2 million, as of December 31, 2014 and 2013, respectively, in indirect consumer
loans to individuals to finance luxury and classic cars as a part of a strategy begun in 2013 to diversify the loan portfolio.
The commercial and commercial real estate
loan categories continue to be the primary focus for the Bank. Our commercial real estate portfolio generally consists of a wide
cross-section of retail, small office, warehouse, and industrial type properties. Loan to value ratios for the Company's commercial
real estate loans generally did not exceed 75% at origination and debt service ratios were generally 125% or better. While we have
significant balances within this lending category, we believe that our lending policies and underwriting standards are sufficient
to reduce risk even in a downturn in the commercial real estate market. Additionally, this is a sector in which we have significant
and long-term management experience. It is our strategic plan to seek growth in commercial and small business loans where available
and in owner occupied commercial real estate loans.
The Company has credit risk exposure related
to real estate loans. The Company makes loans for acquisition, construction and other purposes that are secured by real estate.
At December 31, 2014, loans secured by real estate totaled $403.2 million, which represents 71.4% of the total loan portfolio.
As a result of these concentrations of loans, the loan portfolio is susceptible to deteriorating economic and market conditions
in the Company's market areas. See "Risk Factors" under Item 1A of this report.
We remain active in managing our existing
construction loan and land development portfolios, the balances of which have declined over the last three years. Construction
and land development loans represented 4.8% and 5.7% of total loans outstanding at December 31, 2014 and 2013, respectively. We
believe this segment will remain challenged into 2015, although to a lesser extent than in previous years.
It is the Company’s strategic objective
to maintain concentrations in land and residential construction and total commercial real estate below the regulatory guidelines
of 100% and 300% of risk based capital, respectively. As of December 31, 2014, concentration in land and residential construction
as a percentage of risk based capital was 36.0% and total concentration in non-owner occupied commercial real estate plus land
and residential construction as a percentage of risk-based capital stood at 216.4%. In addition, the Company manages new loan origination
volume using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types,
geography, and single borrower limits.
Loan Maturities and Sensitivity
in Interest Rates. The following table presents information related to maturity distribution and interest rate
sensitivity of loans outstanding (excluding residential mortgages held for sale), based on scheduled repayments at December 31,
2014.
| | |
| | |
Due after | | |
| | |
| |
| | |
Due in one | | |
one through | | |
Due after | | |
| |
| (dollars in thousands) | |
year or less | | |
five years | | |
five years | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Commercial | |
$ | 68,734 | | |
$ | 27,140 | | |
$ | 5,583 | | |
$ | 101,457 | |
| Construction, land development, other land loans | |
| 13,364 | | |
| 19,071 | | |
| 40 | | |
| 32,475 | |
| Residential real estate 1-4 family | |
| 45,924 | | |
| 51,090 | | |
| 5,686 | | |
| 102,700 | |
| Multi-family | |
| - | | |
| 6,163 | | |
| 12,378 | | |
| 18,541 | |
| Farmland | |
| 9,336 | | |
| 8,492 | | |
| 551 | | |
| 18,379 | |
| Commercial real estate | |
| 74,892 | | |
| 173,455 | | |
| 2,948 | | |
| 251,295 | |
| Consumer | |
| 4,313 | | |
| 15,106 | | |
| 17,527 | | |
| 36,946 | |
| Credit cards and overdrafts | |
| 2,520 | | |
| - | | |
| - | | |
| 2,520 | |
| Total | |
$ | 219,083 | | |
$ | 300,517 | | |
$ | 44,713 | | |
$ | 564,313 | |
| Less unearned income | |
| | | |
| | | |
| | | |
| (1,214 | ) |
| Total loans | |
| | | |
| | | |
| | | |
| 563,099 | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Total loans maturing after one year with | |
| | | |
| | | |
| | | |
| | |
| Predetermined interest rates (fixed) | |
| | | |
$ | 78,793 | | |
$ | 30,032 | | |
$ | 108,825 | |
| Floating or adjustable rates (variable) | |
| | | |
| 221,724 | | |
| 14,681 | | |
| 236,405 | |
| Total | |
| | | |
$ | 300,517 | | |
$ | 44,713 | | |
$ | 345,230 | |
At December 31, 2014, 81% of the total
loan portfolio was either due in one year or less or maturing after one year, but with a variable rate. This compares to 82% as
of December 31, 2013. Management seeks to maintain a significant proportion of its loan portfolio subject to near term changes
in interest rates to mitigate interest rate risk.
Asset Quality. The
Company continues to aggressively identify and monitor adversely classified assets and take action based upon available information.
Levels of adversely classified assets increased primarily due to a $4.6 million commercial loan relationship and a $2.0 million
commercial real estate loan. Delinquencies continue to be well-managed and no significant adverse trends have been identified.
Adversely classified loans and securities
| (Dollars in Thousands) | |
| | |
| | |
2014 to
2013 | | |
| | |
2013 to
2012 | |
| | |
December
31, 2014 | | |
December
31, 2013 | | |
$
Change | | |
%
Change | | |
December
31, 2012 | | |
$
Change | | |
%
Change | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Rated substandard or worse, but not
impaired | |
$ | 7,368 | | |
$ | 2,842 | | |
$ | 4,526 | | |
| 159 | % | |
$ | 6,909 | | |
$ | (4,067 | ) | |
| -59 | % |
| Impaired | |
| 11,311 | | |
| 9,922 | | |
| 1,389 | | |
| 14 | % | |
| 14,784 | | |
| (4,862 | ) | |
| -33 | % |
| Total adversely classified
loans¹ | |
$ | 18,679 | | |
$ | 12,764 | | |
$ | 5,915 | | |
| 46 | % | |
$ | 21,693 | | |
$ | (8,929 | ) | |
| -41 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total investment securities² | |
$ | 199 | | |
$ | 1,834 | | |
$ | (1,635 | ) | |
| -89 | % | |
$ | 2,245 | | |
$ | (411 | ) | |
| -18 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Gross loans (excluding deferred loan fees) | |
$ | 564,313 | | |
$ | 505,803 | | |
$ | 58,510 | | |
| 12 | % | |
$ | 449,053 | | |
$ | 56,750 | | |
| 13 | % |
| Adversely classified loans to gross loans | |
| 3.31 | % | |
| 2.52 | % | |
| | | |
| | | |
| 4.83 | % | |
| | | |
| | |
| Allowance for loan losses | |
$ | 8,353 | | |
$ | 8,359 | | |
$ | (6 | ) | |
| 0 | % | |
$ | 9,358 | | |
$ | (999 | ) | |
| -11 | % |
| Allowance for loan losses as a percentage of adversely
classified loans | |
| 44.72 | % | |
| 65.49 | % | |
| | | |
| | | |
| 43.14 | % | |
| | | |
| | |
| Allowance for loan losses to total impaired loans | |
| 73.85 | % | |
| 84.25 | % | |
| | | |
| | | |
| 63.30 | % | |
| | | |
| | |
| Adversely classified loans and securities to total
assets | |
| 2.53 | % | |
| 2.07 | % | |
| | | |
| | | |
| 3.72 | % | |
| | | |
| | |
1 Adversely classified loans are defined as loans
having a well-defined weakness or weaknesses related to the borrower's financial capacity or to pledged collateral that may jeopardize
the repayment of the debt. They are characterized by the possibility that the Bank may sustain some loss if the deficiencies giving
rise to the substandard classification are not corrected. Note that any loans internally rated worse than substandard are included
in the impaired loan totals.
2 Adversely classified investment securities consist
of one private label collateralized mortgage obligation (CMO) as of 12/31/2014 and four private label CMOs as of 12/31/2013 and
12/31/2012.
The following table presents information
related to the Company's delinquent loans, not on non-accrual status, as of December 31 in each of the last three years.
30-89 Days Past Due by type
(Dollars in Thousands)
| | |
| | |
| | |
| | |
| | |
2014 to 2013 | | |
| | |
| | |
2013 to 2012 | |
| | |
December
31, 2014 | | |
% of
Category | | |
December
31, 2013 | | |
% of
Category | | |
$ Change | | |
%
Change | | |
December
31, 2012 | | |
% of
Category | | |
$ Change | | |
%
Change | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Commercial and agricultural | |
$ | - | | |
| 0.0 | % | |
$ | 14 | | |
| 1.0 | % | |
$ | (14 | ) | |
| -100 | % | |
$ | 134 | | |
| 5.3 | % | |
$ | (120 | ) | |
| -90 | % |
| Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Construction and development | |
| 18 | | |
| 2.1 | % | |
| - | | |
| 0.0 | % | |
| 18 | | |
| 100 | % | |
| - | | |
| 0.0 | % | |
| - | | |
| 0 | % |
| Residential 1-4 family | |
| 605 | | |
| 71.9 | % | |
| 333 | | |
| 24.0 | % | |
| 272 | | |
| 82 | % | |
| 1,595 | | |
| 63.2 | % | |
| (1,262 | ) | |
| -79 | % |
| Multi-family | |
| - | | |
| 0.0 | % | |
| - | | |
| 0.0 | % | |
| - | | |
| 0 | % | |
| - | | |
| 0.0 | % | |
| - | | |
| 0 | % |
| Commercial real estate -- owner occupied | |
| - | | |
| 0.0 | % | |
| - | | |
| 0.0 | % | |
| - | | |
| 0 | % | |
| - | | |
| 0.0 | % | |
| - | | |
| 0 | % |
| Commercial real estate -- non owner occupied | |
| - | | |
| 0.0 | % | |
| - | | |
| 0.0 | % | |
| - | | |
| 0 | % | |
| 652 | | |
| 25.9 | % | |
| (652 | ) | |
| -100 | % |
| Farmland | |
| 46 | | |
| 5.5 | % | |
| 875 | | |
| 62.9 | % | |
| (829 | ) | |
| -95 | % | |
| 133 | | |
| 5.3 | % | |
| 742 | | |
| 558 | % |
| Total real estate | |
$ | 669 | | |
| | | |
$ | 1,208 | | |
| | | |
$ | (539 | ) | |
| -45 | % | |
$ | 2,380 | | |
| | | |
$ | -1,172 | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Consumer | |
| 172 | | |
| 20.5 | % | |
| 168 | | |
| 12.1 | % | |
| 4 | | |
| 2 | % | |
| 8 | | |
| 0.3 | % | |
| 160 | | |
| 2000 | % |
| Total loans 30-89 days past due, not in nonaccrual status | |
$ | 841 | | |
| 100.0 | % | |
$ | 1,390 | | |
| 100.0 | % | |
$ | (549 | ) | |
| -39 | % | |
$ | 2,522 | | |
| 100.0 | % | |
$ | (1,132 | ) | |
| -45 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Delinquent loans to total loans, not in nonaccrual status | |
| 0.23 | % | |
| | | |
| 0.28 | % | |
| | | |
| | | |
| | | |
| 0.57 | % | |
| | | |
| | | |
| | |
Non-performing Assets. Non-performing
assets are defined as loans on non-accrual status, loans past due ninety days or more and still accruing interest, and OREO. The
Company's policy for placing loans on non-accrual status is based upon management's evaluation of the ability of the borrower to
meet both principal and interest payments as they become due. Generally, loans with interest or principal payments which are ninety
or more days past due are placed on non-accrual (unless they are well-secured and in the process of collection) and previously
accrued interest is reversed against income.
The following table presents information
related to the Company's non-accrual loans and other non-performing assets at December 31 in each of the last five years.
Non-performing assets
| (Dollars in Thousands) | |
December
31, 2014 | | |
December
31, 2013 | | |
December
31, 2012 | | |
December
31, 2011 | | |
December
31, 2010 | |
| Loans on nonaccrual status | |
| | | |
| | | |
| | | |
| | | |
| | |
| Commercial and agricultural | |
$ | 96 | | |
$ | 286 | | |
$ | 1,901 | | |
$ | 530 | | |
$ | 1,251 | |
| Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Construction and development | |
| 965 | | |
| 1,408 | | |
| 1,792 | | |
| 5,510 | | |
| 5,529 | |
| Residential 1-4 family | |
| 848 | | |
| 400 | | |
| 800 | | |
| 528 | | |
| 2,246 | |
| Commercial real estate -- owner occupied(4) | |
| 1,325 | | |
| 1,659 | | |
| 3,847 | | |
| 629 | | |
| 470 | |
| Commercial real estate -- non owner occupied | |
| 5,482 | | |
| 2,482 | | |
| 5,795 | | |
| 6,539 | | |
| 333 | |
| Farmland | |
| - | | |
| 955 | | |
| 976 | | |
| - | | |
| 170 | |
| Total real estate | |
| 8,620 | | |
| 6,904 | | |
| 13,210 | | |
| 13,206 | | |
| 8,748 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Consumer | |
| - | | |
| 53 | | |
| 1 | | |
| - | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total loans on non accrual status(1) | |
| 8,716 | | |
| 7,243 | | |
| 15,112 | | |
| 13,736 | | |
| 9,999 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans past due greater than 90 days but not on nonaccrual status | |
| 409 | | |
| - | | |
| - | | |
| 299 | | |
| - | |
| Total non-performing loans | |
| 9,125 | | |
| 7,243 | | |
| 15,112 | | |
| 14,035 | | |
| 9,999 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Other real estate owned | |
| | | |
| | | |
| | | |
| | | |
| | |
| Construction, Land Dev & Other Land | |
| 35 | | |
| 237 | | |
| 1,860 | | |
| 4,150 | | |
| 4,043 | |
| 1-4 Family Residential Properties | |
| - | | |
| 672 | | |
| 507 | | |
| 1,427 | | |
| 540 | |
| Nonfarm Nonresidential Properties | |
| 964 | | |
| 1,862 | | |
| 2,312 | | |
| 2,148 | | |
| 1,997 | |
| | |
| 999 | | |
| 2,771 | | |
| 4,679 | | |
| 7,725 | | |
| 6,580 | |
| Total nonperforming assets(2) | |
$ | 10,124 | | |
$ | 10,014 | | |
$ | 19,791 | | |
$ | 21,760 | | |
$ | 16,579 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Troubled debt restructured loans on accrual status | |
| 2,595 | | |
| 2,680 | | |
| 444 | | |
| 398 | | |
| - | |
| Allowance for loan losses | |
| 8,353 | | |
| 8,359 | | |
| 9,358 | | |
| 11,127 | | |
| 10,617 | |
| Allowance to non-performing loans | |
| 91.54 | % | |
| 115.41 | % | |
| 61.92 | % | |
| 79.28 | % | |
| 106.18 | % |
| Allowance to non-performing assets | |
| 82.51 | % | |
| 83.47 | % | |
| 47.28 | % | |
| 51.14 | % | |
| 64.04 | % |
| Non-performing loans to total loans(3) | |
| 1.62 | % | |
| 1.44 | % | |
| 3.37 | % | |
| 2.96 | % | |
| 2.15 | % |
| Non-performing assets to total assets | |
| 1.36 | % | |
| 1.42 | % | |
| 3.08 | % | |
| 3.39 | % | |
| 2.57 | % |
| |
(1) |
Includes $965,000, $1,408,000, $3,930,000, $7,734,000, and $932,000 in non-accrual troubled debt restructured loans ("TDRs") as of December 31, 2014, 2013, 2012, 2011, and 2010, respectively, which are also considered impaired loans. |
| |
(2) |
Does not include TDR's on accrual status. |
| |
(3) |
Excludes loans held for sale. |
| |
(4) |
Includes one loan totaling $1,831,000 at December 31, 2013 of which $1,465,000 is guaranteed by the United States Department of Agriculture. |
At December 31, 2014, total non-performing
assets remained virtually unchanged in dollars from the prior year-end, with an increase in non-performing loans being offset by
a similar decrease in OREO. Approximately one-half, or $4.3 million, is represented by two commercial real estate loan relationships.
The collateral value supporting these loans is considered sufficient to mitigate any potential losses, for which specific reserves
have already been established. One of these relationships, a $1.7 million loan secured by income-producing commercial real estate,
is now paid current as to principal and interest.
Non-performing loans decreased at December
31, 2013, from the balance at December 31, 2012, due to decreases in all non-accrual loan categories except consumer loans. The
decline in non-accrual commercial real estate is primarily the result of partial or full payoffs totaling $3.4 million from six
borrowing relationships. The decrease in non-accrual commercial loans is made up primarily of a partial payoff of one relationship
totaling $1.4 million.
The Company continues to aggressively identify
and monitor non-performing assets and take action based upon available information. Troubled debt restructures (“TDRs”)
declined as of December 31, 2014, as compared to December 31, 2013. TDRs are loans for which the terms have been modified in order
to grant a concession to a borrower that is experiencing financial difficulty. TDRs are considered impaired loans and reported
as such. For more information regarding TDRs, see Note 4 - "Loans" to the Company's audited financial statements included
in Item 15 of this report.
Interest income on non-accrual loans that
would have been recorded had those loans performed in accordance with their initial terms was $679,000, $1,130,000 and $1,213,000
for 2014, 2013 and 2012, respectively. Interest income recognized on impaired loans was $404,000, $177,000 and $226,000 for 2014,
2013 and 2012, respectively.
Currently, it is our practice to obtain
new appraisals on non-performing collateral dependent loans and/or OREO semi-annually on land and every nine months on improved
properties. Based upon its review of the appraisal, the Company will record the loan at the lower of carrying value or fair value
of collateral (less costs to sell) by recording a charge-off to the allowance for loan losses or by designating a specific reserve.
Generally, the Company will record the charge-off rather than designate a specific reserve.
OREO at December 31, 2014 was down from
the previous year-end primarily due to a decline in transfers into OREO from outstanding loans during the current year. In addition,
impairment charges declined due to improvement in real estate prices and reduced levels of these assets. Management continues to
market its OREO properties through an orderly liquidation process rather than engaging in immediate liquidation that it believes
may result in discounts greater than the projected carrying costs. Most of the properties held as OREO are commercial real estate.
Other real estate owned and foreclosed assets
(Unaudited)
(Dollars in Thousands)
| |
|
December |
|
|
% of |
|
|
December |
|
|
% of |
|
|
2014
to 2013 |
|
|
December |
|
|
% of |
|
|
2013
to 2012 |
|
| For the Twelve Months Ended |
|
31, 2014 |
|
|
Category |
|
|
31, 2013 |
|
|
Category |
|
|
$ Change |
|
|
% Change |
|
|
31, 2012 |
|
|
Category |
|
|
$ Change |
|
|
% Change |
|
| Other real estate owned, beginning of period |
|
$ |
2,771 |
|
|
|
277 |
% |
|
$ |
4,679 |
|
|
|
169 |
% |
|
$ |
(1,908 |
) |
|
|
-41 |
% |
|
$ |
7,725 |
|
|
|
165 |
% |
|
$ |
(3,046 |
) |
|
|
-39 |
% |
| Transfers from outstanding loans |
|
|
842 |
|
|
|
84 |
% |
|
|
1,756 |
|
|
|
63 |
% |
|
|
(914 |
) |
|
|
-52 |
% |
|
|
3,082 |
|
|
|
66 |
% |
|
|
(1,326 |
) |
|
|
-43 |
% |
| Proceeds from sales |
|
|
(2,340 |
) |
|
|
-234 |
% |
|
|
(2,758 |
) |
|
|
-100 |
% |
|
|
418 |
|
|
|
-15 |
% |
|
|
(5,145 |
) |
|
|
-110 |
% |
|
|
2,387 |
|
|
|
-46 |
% |
| Net gain (loss) on sales |
|
|
(207 |
) |
|
|
-21 |
% |
|
|
40 |
|
|
|
1 |
% |
|
|
(247 |
) |
|
|
-618 |
% |
|
|
331 |
|
|
|
7 |
% |
|
|
(291 |
) |
|
|
-88 |
% |
| Impairment charges |
|
|
(67 |
) |
|
|
-6 |
% |
|
|
(946 |
) |
|
|
-34 |
% |
|
|
879 |
|
|
|
-93 |
% |
|
|
(1,314 |
) |
|
|
-28 |
% |
|
|
368 |
|
|
|
-28 |
% |
| Total other real estate owned |
|
$ |
999 |
|
|
|
100 |
% |
|
$ |
2,771 |
|
|
|
100 |
% |
|
$ |
(1,772 |
) |
|
|
-64 |
% |
|
$ |
4,679 |
|
|
|
100 |
% |
|
$ |
(1,908 |
) |
|
|
-41 |
% |
Other real estate owned and foreclosed assets by type
(Unaudited)
(Dollars in Thousands)
| |
|
December |
|
|
# of |
|
|
December |
|
|
# of |
|
|
2014
to 2013 |
|
|
December |
|
|
# of |
|
|
2013
to 2012 |
|
| |
|
31, 2014 |
|
|
Properties |
|
|
31, 2013 |
|
|
Properties |
|
|
$ Change |
|
|
% Change |
|
|
31, 2012 |
|
|
Properties |
|
|
$ Change |
|
|
% Change |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Construction, Land Dev & Other Land |
|
$ |
35 |
|
|
|
1 |
|
|
$ |
237 |
|
|
|
5 |
|
|
$ |
(202 |
) |
|
|
-85 |
% |
|
$ |
1,860 |
|
|
|
13 |
|
|
$ |
(1,623 |
) |
|
|
-87 |
% |
| 1-4 Family Residential Properties |
|
|
- |
|
|
|
- |
|
|
|
672 |
|
|
|
4 |
|
|
|
(672 |
) |
|
|
-100 |
% |
|
|
507 |
|
|
|
4 |
|
|
|
165 |
|
|
|
33 |
% |
| Nonfarm Nonresidential Properties |
|
|
964 |
|
|
|
3 |
|
|
|
1,862 |
|
|
|
8 |
|
|
|
(898 |
) |
|
|
-48 |
% |
|
|
2,312 |
|
|
|
9 |
|
|
|
(450 |
) |
|
|
-19 |
% |
| Total OREO by type |
|
$ |
999 |
|
|
|
4 |
|
|
$ |
2,771 |
|
|
|
17 |
|
|
$ |
(1,772 |
) |
|
|
-64 |
% |
|
$ |
4,679 |
|
|
|
26 |
|
|
$ |
(1,908 |
) |
|
|
-41 |
% |
Allowance and Provision for Credit
Losses. The allowance for loan losses reflects management's current estimate of the amount required to absorb probable
losses on loans in its loan portfolio based on factors present as of the end of the period. Loans deemed uncollectible are charged
against and reduce the allowance.
Periodic provisions for credit losses are
charged to current expense to replenish the allowance for loan losses in order to maintain the allowance at a level that management
considers adequate. The amount of provision is based on an analysis of various factors including historical loss experience based
on volumes and types of loans, volumes and trends in delinquencies and non-accrual loans, trends in portfolio volume, results of
internal and independent external credit reviews, and anticipated economic conditions. Estimated loss factors used in the allowance
for loan loss analysis are established based in part on historic charge-off data by loan category, portfolio migration analysis,
economic conditions and other qualitative factors. During the year ended December 31, 2014, based upon charge-off experience and
other factors considered by management, the loss factors used in the allowance for loan losses were updated from 0.40% to 0.30%
on pass rated commercial loans, from 0.40% to 0.35% on non owner-occupied commercial real estate loans, from 0.55% to 0.35% on
owner-occupied commercial real estate and from 0.65% to 0.60% on residential real estate. Loss factors for land and land development
loans, speculative residential construction, personal lines of credit and other consumer loans remained unchanged. As a result,
the estimate for the allowance for loan losses decreased. See “Critical Accounting Policies” in this section above,
as well as “Risk Factors” under Item 1A. above.
Transactions in the allowance for loan
losses for the years ended December 31 are as follows:
Allowance for Loan Losses
(Dollars in Thousands)
| For the Twelve Months Ended | |
December
31, 2014 | | |
December
31, 2013 | | |
December
31, 2012 | | |
December
31, 2011 | | |
December
31, 2010 | |
| | |
| | |
| | |
| | |
| | |
| |
| Gross loans outstanding at end of period | |
$ | 564,313 | | |
$ | 505,803 | | |
$ | 449,053 | | |
$ | 475,734 | | |
$ | 466,509 | |
| Average loans outstanding, gross | |
$ | 536,971 | | |
$ | 477,356 | | |
$ | 466,086 | | |
$ | 483,974 | | |
$ | 485,872 | |
| Allowance for loan losses, beginning of period | |
$ | 8,359 | | |
$ | 9,358 | | |
$ | 11,127 | | |
$ | 10,617 | | |
$ | 11,092 | |
| Charge-offs | |
| | | |
| | | |
| | | |
| | | |
| | |
| Commercial | |
| (26 | ) | |
| (131 | ) | |
| (67 | ) | |
| (161 | ) | |
| (469 | ) |
| Commercial Real Estate | |
| (533 | ) | |
| (90 | ) | |
| (827 | ) | |
| (2,005 | ) | |
| (2,055 | ) |
| Residential Real Estate | |
| (129 | ) | |
| (453 | ) | |
| (576 | ) | |
| (665 | ) | |
| (1,518 | ) |
| Consumer | |
| (79 | ) | |
| (154 | ) | |
| (309 | ) | |
| (93 | ) | |
| (119 | ) |
| Total charge-offs | |
| (767 | ) | |
| (828 | ) | |
| (1,779 | ) | |
| (2,924 | ) | |
| (4,161 | ) |
| Recoveries | |
| | | |
| | | |
| | | |
| | | |
| | |
| Commercial | |
| 11 | | |
| 36 | | |
| 23 | | |
| 69 | | |
| 13 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Commercial Real Estate | |
| 425 | | |
| 226 | | |
| 917 | | |
| 750 | | |
| 19 | |
| Residential Real Estate | |
| 22 | | |
| 14 | | |
| 162 | | |
| 107 | | |
| 48 | |
| Consumer | |
| 3 | | |
| 3 | | |
| 8 | | |
| 8 | | |
| 6 | |
| Total recoveries | |
| 461 | | |
| 279 | | |
| 1,110 | | |
| 934 | | |
| 86 | |
| Net charge-offs | |
| (306 | ) | |
| (549 | ) | |
| (669 | ) | |
| (1,990 | ) | |
| (4,075 | ) |
| Provision for (recapture of) loan losses | |
| 300 | | |
| (450 | ) | |
| (1,100 | ) | |
| 2,500 | | |
| 3,600 | |
| Allowance for loan losses, end of period | |
$ | 8,353 | | |
$ | 8,359 | | |
$ | 9,358 | | |
$ | 11,127 | | |
$ | 10,617 | |
Ratio of net loans charged-off to average gross loans
outstanding, annualized | |
| 0.06 | % | |
| 0.12 | % | |
| 0.14 | % | |
| 0.41 | % | |
| 0.84 | % |
| Ratio of allowance for loan losses to gross loans outstanding | |
| 1.48 | % | |
| 1.65 | % | |
| 2.08 | % | |
| 2.34 | % | |
| 2.28 | % |
The allowance for loan losses continues
to decline in relation to total loans in concert with the general trend of improvement in charge offs and delinquencies after incorporating
loss potential of adversely classified loans. As such, loss factors used in estimates to establish reserve levels have declined.
A provision was made to the allowance for loan losses in the current year, corresponding to recent growth in the loan portfolio.
The recapture of provision in the prior year was primarily the
result of the continued overall improvement in credit quality, as evidenced by decreases in net charge-offs, non-performing loans
and performing loans classified as substandard or worse. During 2012, the recapture of provision was mostly due to the elimination
of a $1.7 million specific impairment reserve as a result of a favorable ruling with respect to a government guaranty.
The Company's loan portfolio contains a
significant portion of government guaranteed loans which are fully guaranteed by the United States Government. Government guaranteed
loans were $32.8 million and $37.8 million at December 31, 2014 and 2013, respectively. The ratio of the allowance for loan losses
to total loans outstanding excluding the government guaranteed loans was 1.56% and 1.76%, respectively.
There is no precise method of predicting
specific credit losses or amounts that ultimately may be charged off. The determination that a loan may become uncollectible, in
whole or in part, is a matter of significant management judgment. Similarly, the adequacy of the allowance for loan losses is a
matter of judgment that requires consideration of many factors, including (a) economic conditions and the effect on particular
industries and specific borrowers; (b) a review of borrowers' financial data, together with industry data, the competitive situation,
the borrowers' management capabilities and other factors; (c) a continuing evaluation of the loan portfolio, including monitoring
by lending officers and staff credit personnel of all loans which are identified as being of less than acceptable quality; (d)
an in-depth review, at a minimum of quarterly or more frequently as considered necessary, of all loans judged to present a possibility
of loss (if, as a result of such quarterly review, the loan is judged to be not fully collectible, the carrying value of the loan
is reduced to that portion considered collectible); and (e) an evaluation of the underlying collateral for secured lending, including
the use of independent appraisals of real estate properties securing loans. An analysis of the adequacy of the allowance is conducted
by management quarterly and is reviewed by the Board of Directors. Based on this analysis and applicable accounting standards,
management considers the allowance for loan losses to be adequate at December 31, 2014.
The Financial Accounting Standards Board
(FASB) has issued accounting guidance relating to 1) accounting by creditors for impairment of a loan and 2) accounting by creditors
for impairment of a loan for income recognition disclosures. The Company measures impaired loans based on the present value
of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair market value of the collateral if the loan is collateral dependent. The Company excludes loans that
are currently measured at fair value or at the lower of cost or fair value, and certain large groups of smaller balance homogeneous
loans that are collectively measured for impairment.
The following table summarizes the Bank's impaired loans at
December 31:
(Dollars in Thousands)
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
| Total impaired loans |
|
$ |
11,311 |
|
|
$ |
9,922 |
|
|
$ |
14,784 |
|
|
$ |
14,432 |
|
|
$ |
14,673 |
|
| Total impaired loans with valuation allowance |
|
|
249 |
|
|
|
- |
|
|
|
- |
|
|
|
4,498 |
|
|
|
508 |
|
| Valuation allowance related to impaired loans |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,032 |
|
|
|
142 |
|
No valuation allowance was considered necessary
for the remaining impaired loans. The balance of the allowance for loan losses in excess of these specific reserves is available
to absorb losses from all non-impaired loans. It is the Company's policy to charge-off any loan or portion of a loan that is deemed
uncollectible in the ordinary course of business. The entire allowance for loan losses is available to absorb such charge-offs.
The Company allocates its allowance
for loan losses among major loan categories primarily on the basis of historical data. Based on certain characteristics of
the portfolio and management's analysis, losses can be estimated for major loan categories. The following table presents the allocation
of the allowance for loan losses among the major loan categories based primarily on historical net charge-off experience and other
considerations at December 31 in each of the last five years.
(Dollars in Thousands)
| For the Twelve Months Ended |
|
December
31, 2014 |
|
|
% of total
loans* |
|
|
December
31, 2013 |
|
|
% of total
loans* |
|
|
December
31, 2012 |
|
|
% of total
loans* |
|
|
December
31, 2011 |
|
|
% of total
loans* |
|
|
December
31, 2010 |
|
|
% of total
loans* |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial loans |
|
$ |
1,022 |
|
|
|
20 |
% |
|
$ |
775 |
|
|
|
19 |
% |
|
$ |
923 |
|
|
|
19 |
% |
|
$ |
1,012 |
|
|
|
18 |
% |
|
$ |
816 |
|
|
|
19 |
% |
| Real estate loans |
|
|
4,120 |
|
|
|
74 |
% |
|
|
4,181 |
|
|
|
79 |
% |
|
|
4,927 |
|
|
|
79 |
% |
|
|
7,849 |
|
|
|
80 |
% |
|
|
7,139 |
|
|
|
79 |
% |
| Consumer loans |
|
|
979 |
|
|
|
6 |
% |
|
|
744 |
|
|
|
2 |
% |
|
|
531 |
|
|
|
2 |
% |
|
|
642 |
|
|
|
2 |
% |
|
|
690 |
|
|
|
2 |
% |
| Unallocated |
|
|
2,232 |
|
|
|
0 |
% |
|
|
2,659 |
|
|
|
0 |
% |
|
|
2,977 |
|
|
|
0 |
% |
|
|
1,624 |
|
|
|
0 |
% |
|
|
1,972 |
|
|
|
0 |
% |
| Total allowance |
|
$ |
8,353 |
|
|
|
100 |
% |
|
$ |
8,359 |
|
|
|
100 |
% |
|
$ |
9,358 |
|
|
|
100 |
% |
|
$ |
11,127 |
|
|
|
100 |
% |
|
$ |
10,617 |
|
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ratio of allowance
for loan losses to gross loans outstanding |
|
|
1.48 |
% |
|
|
|
|
|
|
1.66 |
% |
|
|
|
|
|
|
2.09 |
% |
|
|
|
|
|
|
2.34 |
% |
|
|
|
|
|
|
2.28 |
% |
|
|
|
|
* Represents the total of all outstanding loans in
each category as a percent of total loans outstanding
The table indicates decreases during 2014
in the portion of the allowance related to real estate loans, respectively, which were partially offset by an increase in the portion
related to commercial and consumer loans. The significant decline in real estate and unallocated portions of the reserve is due
to the reduction in loss factors associated with these loan categories and the overall improvement in credit quality as previously
mentioned. The increase in the allowance related to commercial and consumer loans resulted from an increase in classified loans
in this sector, as previously noted. The increase in the allowance related to consumer loans resulted from growth in this sector.
The unallocated portion of the allowance declined due to a reduction in qualitative risk factors corresponding to improving trends
in economic conditions.
The table indicates decreases during 2013
in the portion of the allowance related to commercial and real estate loans, respectively, which were partially offset by an increase
in the portion related to consumer loans. The significant decline in 2013 in the commercial, real estate and unallocated portions
of the reserve is due to the reduction in loss factors associated with these loan categories and the overall improvement in credit
quality as previously mentioned. The increase in the allowance related to consumer loans resulted from a growth in loans in this
sector during 2013. The significant decline in 2012 in the real estate portion of the reserve is due to the elimination of a $1.7
million impairment reserve.
Deposits
Total deposits were up at December 31,
2014, compared to the previous two years. Non-interest bearing demand and interest-bearing demand deposits increased due to recent
success in acquiring business deposit relationships in conjunction with the growth in lending achieved over the past year. The
combination of our efforts to reduce higher-cost time deposits through lowering interest rates paid and offering non-insured deposit
products continued to impact the balances of these types of deposits. Due to the low interest rate environment, many CD customers
opted to place their maturing balances in checking or money market accounts while waiting for interest rates to improve. Growth
in all categories in 2013 was also the result of the acquisition of three Sterling branches in second quarter 2013, representing
$37.6 million in deposits.
Total brokered deposits were $22.4 million
at December 31, 2014, which included $2.3 million via reciprocal deposit arrangements. This compares to $21.6 million at December
31, 2013, which included $3.9 million via reciprocal deposit arrangements. Brokered deposits have been acquired over the past several
years at historically low rates for extended maturities to help insulate the Bank in a rising rate environment. The weighted average
term of these brokered deposits is 50 months. Longer term CDs are generally not available in the retail market as customers generally
desire to keep funds more liquid and accessible. The Company views the prudent use of brokered deposits and borrowings to be an
appropriate funding tool to support interest rate risk mitigation strategies.
The Company's primary source of funds has
historically been customer deposits. A variety of deposit products are offered to attract customer deposits. These products include
non-interest bearing demand accounts, NOW accounts, savings accounts, and time deposits. Interest-bearing accounts earn interest
at rates established by management based on competitive market factors and the need to increase or decrease certain types or maturities
of deposits. The Company has succeeded in growing its deposit base over the last three years despite increasing competition for
deposits in our markets. The Company believes that it has benefited from its local identity and superior customer service. Attracting
deposits remains integral to the Company's business as it is the primary source of funds for loans and a major decline in deposits
or failure to attract deposits in the future could have an adverse effect on results of operations and financial condition. The
Company's strategic plan contemplates and focuses on continued growth in non-interest bearing accounts, which contribute to higher
levels of non-interest income and net interest margin, through increased sales efforts and continued focus on customer service
and emphasis on our expanded electronic services. We expect significant competition for deposits of this nature to continue for
the foreseeable future as loan demand improves within our markets.
Deposit detail by category as of December 31, 2014, 2013 and
2012, respectively, follows:
| Deposits | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| (Dollars in Thousands) | |
December 31,
2014 | | |
December 31,
2013 | | |
December 31,
2012 | |
| | |
| | |
| | |
| |
| Interest-bearing demand (NOW) | |
$ | 151,130 | | |
$ | 144,221 | | |
$ | 125,758 | |
| Money market deposits | |
| 123,484 | | |
| 118,627 | | |
| 106,849 | |
| Savings deposits | |
| 79,997 | | |
| 73,412 | | |
| 62,493 | |
| Time, interest deposits (CD's) | |
| 118,683 | | |
| 126,059 | | |
| 138,005 | |
| Total interest-bearing deposits | |
| 473,294 | | |
| 462,319 | | |
| 433,105 | |
| Non-interest bearing demand | |
| 165,760 | | |
| 145,028 | | |
| 115,138 | |
| Total deposits | |
$ | 639,054 | | |
$ | 607,347 | | |
$ | 548,243 | |
The ratio of non-interest bearing deposits to total deposits
is displayed in the table below.
Deposits
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 to 2013 |
|
|
|
|
|
|
|
|
2013 to 2012 |
|
| (Dollars in Thousands) |
|
December 31,
2014 |
|
|
Percent of
Total |
|
|
December 31,
2013 |
|
|
Percent of
Total |
|
|
$ Change |
|
|
% Change |
|
|
December
31, 2012 |
|
|
Percent of
Total |
|
|
$ Change |
|
|
% Change |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing demand and money market |
|
$ |
274,614 |
|
|
|
42 |
% |
|
$ |
262,848 |
|
|
|
43 |
% |
|
$ |
11,766 |
|
|
|
4 |
% |
|
$ |
232,607 |
|
|
|
43 |
% |
|
$ |
30,241 |
|
|
|
13 |
% |
| Savings |
|
|
79,997 |
|
|
|
13 |
% |
|
|
73,412 |
|
|
|
12 |
% |
|
|
6,585 |
|
|
|
9 |
% |
|
|
62,493 |
|
|
|
11 |
% |
|
|
10,919 |
|
|
|
17 |
% |
| Time deposits |
|
|
118,683 |
|
|
|
19 |
% |
|
|
126,059 |
|
|
|
21 |
% |
|
|
(7,376 |
) |
|
|
-6 |
% |
|
|
138,005 |
|
|
|
25 |
% |
|
|
(11,946 |
) |
|
|
-9 |
% |
| Total interest-bearing deposits |
|
|
473,294 |
|
|
|
74 |
% |
|
|
462,319 |
|
|
|
76 |
% |
|
|
10,975 |
|
|
|
2 |
% |
|
|
433,105 |
|
|
|
79 |
% |
|
|
29,214 |
|
|
|
7 |
% |
| Non-interest bearing demand |
|
|
165,760 |
|
|
|
26 |
% |
|
|
145,028 |
|
|
|
24 |
% |
|
|
20,732 |
|
|
|
14 |
% |
|
|
115,138 |
|
|
|
21 |
% |
|
|
29,890 |
|
|
|
26 |
% |
| Total deposits |
|
$ |
639,054 |
|
|
|
100 |
% |
|
$ |
607,347 |
|
|
|
100 |
% |
|
$ |
31,707 |
|
|
|
5 |
% |
|
$ |
548,243 |
|
|
|
100 |
% |
|
$ |
59,104 |
|
|
|
11 |
% |
The following table sets forth the average
balances for each major category of deposits and the weighted average interest rate paid for deposits for the periods indicated.
| Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in Thousands) |
|
December 31,
2014 |
|
|
Rate |
|
|
December 31,
2013 |
|
|
Rate |
|
|
December 31,
2012 |
|
|
Rate |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing demand (NOW) |
|
$ |
147,225 |
|
|
|
0.23 |
% |
|
$ |
131,179 |
|
|
|
0.30 |
% |
|
$ |
120,472 |
|
|
|
0.48 |
% |
| Money market and savings deposits |
|
|
196,859 |
|
|
|
0.12 |
% |
|
|
185,005 |
|
|
|
0.27 |
% |
|
|
168,512 |
|
|
|
0.30 |
% |
| Time, interest deposits (CD's) |
|
|
122,002 |
|
|
|
0.89 |
% |
|
|
135,447 |
|
|
|
0.98 |
% |
|
|
144,486 |
|
|
|
1.24 |
% |
| Total interest-bearing deposits |
|
|
466,086 |
|
|
|
|
|
|
|
451,631 |
|
|
|
|
|
|
|
433,470 |
|
|
|
|
|
| Non-interest bearing demand |
|
|
158,697 |
|
|
|
0.00 |
% |
|
|
129,218 |
|
|
|
0.00 |
% |
|
|
107,048 |
|
|
|
0.00 |
% |
| Total deposits |
|
$ |
624,783 |
|
|
|
0.27 |
% |
|
$ |
580,849 |
|
|
|
0.35 |
% |
|
$ |
540,518 |
|
|
|
0.53 |
% |
Maturities of time certificates of deposit
as of December 31, 2014 are summarized as follows:
| At December 31, 2014 |
|
|
|
|
|
|
|
|
|
| (Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Under |
|
|
Over |
|
|
|
|
| |
|
$100,000 |
|
|
$100,000 |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
| 3 months or less |
|
$ |
9,636 |
|
|
$ |
20,202 |
|
|
$ |
29,838 |
|
| Over 3 through 6 months |
|
|
7,939 |
|
|
|
4,683 |
|
|
|
12,622 |
|
| Over 6 through 12 months |
|
|
10,662 |
|
|
|
14,516 |
|
|
|
25,178 |
|
| Over 12 months |
|
|
14,798 |
|
|
|
36,247 |
|
|
|
51,045 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total time certificates |
|
$ |
43,035 |
|
|
$ |
75,648 |
|
|
$ |
118,683 |
|
Short-Term Borrowings
The following is information regarding
the Company's short-term borrowings for the years ended December 31, 2014, 2013 and 2012.
| (Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| |
|
|
|
|
|
|
|
|
|
| Amount outstanding at end of period |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,000 |
|
| Weighted average interest rate thereon |
|
|
0.28 |
% |
|
|
- |
|
|
|
2.94 |
% |
| Maximum month-end balance during year |
|
$ |
- |
|
|
$ |
3,000 |
|
|
$ |
3,000 |
|
| Average balance during the year |
|
$ |
153 |
|
|
$ |
303 |
|
|
$ |
2,697 |
|
| Average interest rate during the year |
|
|
0.28 |
% |
|
|
2.94 |
% |
|
|
2.94 |
% |
CONTRACTUAL OBLIGATIONS
The Company is party to many contractual
financial obligations at December 31, 2014, including without limitation, borrowings from the FHLB, junior subordinated debentures
associated with trust preferred securities and operating leases for branch locations. The following is information regarding the
dates payments for such obligations are due.
| |
|
Payments due by period |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than |
|
|
1-2 |
|
|
3-5 |
|
|
More than |
|
|
|
|
| |
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
$ |
491 |
|
|
$ |
567 |
|
|
$ |
462 |
|
|
$ |
412 |
|
|
$ |
1,932 |
|
| Total deposits |
|
|
422,249 |
|
|
|
40,104 |
|
|
|
10,879 |
|
|
|
62 |
|
|
|
473,294 |
|
| Federal home loan bank borrowings |
|
|
- |
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
1,453 |
|
|
|
11,453 |
|
| Junior subordinated debentures |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13,403 |
|
|
|
13,403 |
|
COMMITMENTS AND CONTINGENCIES AND OFF-BALANCE
SHEET ARRANGEMENTS
The Bank is party to financial instruments
with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit, and involve, to varying degrees, elements of credit risk in
excess of the amount recognized on the consolidated balance sheets.
The Bank's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as they do for on-balance-sheet instruments. A summary of the Bank's commitments at December 31 is
as follows:
| (Dollars in Thousands) |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| |
|
December 31,
2014 |
|
|
December 31,
2013 |
|
| |
|
|
|
|
|
|
|
|
| Commitments to extend credit |
|
$ |
109,545 |
|
|
$ |
106,017 |
|
| Standby letters of credit |
|
$ |
1,351 |
|
|
$ |
1,733 |
|
KEY FINANCIAL RATIOS
FINANCIAL PERFORMANCE OVERVIEW
For The Twelve Months Ended
| |
|
December
31, 2014 |
|
|
December
31, 2013 |
|
|
December
31, 2012 |
|
|
December
31, 2011 |
|
|
December
31, 2010 |
|
| Selective performance ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Return on average assets, annualized |
|
|
0.68 |
% |
|
|
0.55 |
% |
|
|
0.75 |
% |
|
|
0.44 |
% |
|
|
0.25 |
% |
| Return on average equity, annualized |
|
|
6.92 |
% |
|
|
5.48 |
% |
|
|
7.28 |
% |
|
|
4.45 |
% |
|
|
2.77 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dividend payout ratio |
|
|
44 |
% |
|
|
55 |
% |
|
|
42 |
% |
|
|
0 |
% |
|
|
0 |
% |
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The primary
concern of depositors, creditors and regulators is the Company's ability to have sufficient funds readily available to repay liabilities
as they mature. In order to evaluate whether adequate funds are and will be available, the Company monitors and projects the amount
of funds required on a daily basis. The Bank's primary source of liquidity is deposits from its customer base, which has historically
provided a stable source of "core" demand and consumer deposits. Other sources of liquidity are available, including
borrowings from the FHLB, the Federal Reserve Bank, and from correspondent banks. Liquidity requirements can also be met through
disposition of short-term assets. In management's opinion, the Company maintains an adequate level of liquid assets for its known
and reasonably foreseeable liquidity requirements, consisting of cash and amounts due from banks, interest bearing deposits and
federal funds sold to support daily cash flow requirements.
Management expects to continue to rely
on customer deposits as the primary source of liquidity, but may also obtain liquidity from maturity of its investment securities,
sale of securities currently available for sale, loan sales, brokered deposits, government sponsored programs, loan repayments,
net income, and other borrowings. Although deposit balances have shown historical growth, deposit habits of customers may be influenced
by changes in the financial services industry, interest rates available on other investments, general economic conditions, consumer
confidence, changes to government insurance programs, and competition. Competition for deposits is presently quite intense, even
in our traditional markets of operations in Western Washington, making deposit retention challenging and new deposit growth quite
difficult. Any significant reduction in deposits could adversely affect the Company's financial condition, results of operations,
and liquidity. See "Risk Factors" under Item 1A. above.
At December 31, 2014, the Bank had $11.5
million in outstanding borrowings against its $149.7 million in established borrowing capacity with the FHLB, as compared to$10.0
million outstanding against a borrowing capacity of $143.1 million at December 31, 2013. The Bank’s borrowing facility with
the FHLB is subject to collateral and stock ownership requirements. The Bank also had an available discount window primary credit
line with the Federal Reserve Bank of San Francisco of approximately $52.9 million, subject to collateral requirements, and $16.0
million from correspondent banks with no balance outstanding on any of these facilities.
The holding company specifically relies
on dividends from the Bank, proceeds from the exercise of stock options, and proceeds from the issuance of trust preferred securities
for its funds, which are used for various corporate purposes. In addition, the exercise of outstanding warrants during 2013 provided
a nonrecurring source of additional funds during that year. Dividends from the Bank are the holding company's most important source
of funds, and are subject to regulatory restrictions and the capital needs of the Bank, which are always primary.
At December 31, 2014, two wholly-owned
subsidiary grantor trusts established by the Company had issued and outstanding $13.4 million of trust preferred securities (“TRUPs”).
As of December 31, 2014 and 2013, interest on TRUPs totaled $40,000 and $40,000 in each year, and is included in accrued interest
payable on the balance sheet. For more information regarding the Company's issuance of TRUPs, see Note 10 "Junior Subordinated
Debentures" to the audited consolidated financial statements included under Item 15 of this report.
Capital. The Company
conducts its business through the Bank. Thus, the Company needs to be able to provide capital and financing to the Bank should
the need arise. The primary sources for obtaining capital are additional stock sales and retained earnings. The Company's Board
of Directors considers financial results, growth plans, and anticipated capital needs in formulating its dividend policy. The payment
of dividends is subject to adequate financial resources at the Bank, which depend in part on operating results and limitations
imposed by law and governmental regulations or actions of regulators.
The Federal Reserve has established guidelines
for risk-based capital requirements for bank holding companies. Under the guidelines, one of four risk weights is applied to balance
sheet assets, each with different capital requirements based on the credit risk of the asset. The Company's capital ratios include
the assets of the Bank on a consolidated basis in accordance with the requirements of the Federal Reserve. The Company's capital
ratios have exceeded the minimum required to be classified "well capitalized" during each of the past three years.
The Company and its Bank subsidiary continue
to satisfy the requirements to qualify as “well-capitalized” under regulatory guidelines. Capital growth is provided
primarily through earnings retention. Also, $1.2 million of additional capital was supplied in the current year via the exercise
at a price of $6.50 per share of warrants to purchase 185,000 shares of common stock originally issued in conjunction with a private
capital raise conducted in 2009. In general, capital ratios declined from December 31, 2013 due to the successful execution of
the Company’s growth strategy and shift in the balance sheet mix to higher risk-weighted loan assets.
The Board of Governors of the Federal Reserve
System (“Federal Reserve”) and the FDIC have established minimum requirements for capital adequacy for bank holding
companies and state non-member banks. For more information on these topics, see the discussions under the subheading “Capital
Adequacy” in the section “Business” included in Item 1 of this Form 10-K for the year ended December 31, 2014.
The total risk based capital ratios of
the Company include $13.4 million of junior subordinated debentures, all of which qualified as Tier 1 capital at December 31, 2014
and 2013, under guidance issued by the Federal Reserve. The Company expects to continue to rely on these junior subordinated debentures
as part of its regulatory capital.
The following table sets forth the minimum
required capital ratios and actual ratios for December 31, 2014 and 2013.
| (Dollars in Thousands) |
|
December
31, 2014 |
|
|
December
31, 2013 |
|
|
Change |
|
|
Regulatory
Minimum to
be "Well
Capitalized" |
|
| |
|
|
|
|
|
|
|
|
|
|
greater than or equal to |
|
| Pacific Financial Corporation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Actual amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total risk-based capital ratio |
|
|
13.61 |
% |
|
|
14.11 |
% |
|
|
(0.51 |
) |
|
|
10 |
% |
| Tier 1 risk-based capital ratio |
|
|
12.36 |
% |
|
|
12.85 |
% |
|
|
(0.50 |
) |
|
|
6 |
% |
| Leverage ratio |
|
|
9.80 |
% |
|
|
9.83 |
% |
|
|
(0.02 |
) |
|
|
5 |
% |
| Tangible common equity ratio |
|
|
8.05 |
% |
|
|
7.74 |
% |
|
|
0.31 |
|
|
|
n/a |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Bank of the Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total risk-based capital ratio |
|
|
13.52 |
% |
|
|
14.03 |
% |
|
|
(0.51 |
) |
|
|
10 |
% |
| Tier 1 risk-based capital ratio |
|
|
12.27 |
% |
|
|
12.78 |
% |
|
|
(0.51 |
) |
|
|
6 |
% |
| Leverage ratio |
|
|
9.73 |
% |
|
|
9.77 |
% |
|
|
(0.04 |
) |
|
|
5 |
% |
Goodwill Valuation. Goodwill
is assigned to reporting units for purposes of impairment testing. The Company has one reporting unit, the Bank, for purposes of
computing goodwill. The Company performs an annual review in the second quarter of each fiscal year, or more frequently if indications
of potential impairment exist, to determine if the recorded goodwill is impaired. As of December 31, 2014, management determined
there were no events or circumstances which would more likely than not reduce the fair value of its reporting unit below its carrying
value.
A significant amount of judgment is involved
in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in
expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse
change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition.
Any adverse change in these factors could have a significant impact on the recoverability of such assets and could have a material
impact on the Company’s Consolidated Financial Statements.
The goodwill impairment test involves a
two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. If
the reporting unit’s fair value is less than its carrying value, the Company is required to progress to the second step.
In the second step the Company calculates the implied fair value of its reporting unit and, in accordance with applicable GAAP
standards, compares the implied fair value of goodwill to the carrying amount of goodwill on the Company’s balance sheet. If
the carrying amount of the goodwill is greater than the implied fair value of that goodwill, an impairment loss must be recognized
in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as goodwill recognized
in a business combination. The estimated fair value of the Company is allocated to all of the Company’s individual
assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business
combination and the estimated fair value of the Company is the price paid to acquire it. The allocation process is performed only
for purposes of determining whether a goodwill impairment exists and the amount of any such impairment. No assets or liabilities
are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as a part of this process.
The Company estimates fair value using
the best information available, including market information and a discounted cash flow analysis, which is also referred to as
the income approach. The income approach uses a reporting unit’s projection of estimated operating results and cash flows
that is discounted using a rate that reflects current market conditions. The projection uses management’s best estimates
of economic and market conditions over the projected period including growth rates in loans and deposits, estimates of future expected
changes in net interest margins and cash expenditures. The market approach estimates fair value by applying cash flow multiples
to the reporting unit’s operating performance. The multiples are derived from comparable publicly traded companies with similar
operating and investment characteristics of the reporting unit. We validate our estimated fair value by comparing the fair value
estimates using the income approach to the fair value estimates using the market approach.
As part of our process for performing the
step one impairment test of goodwill, the Company estimated the fair value of the reporting unit utilizing the income approach
and the market approach in order to derive an enterprise value of the Company. In determining the discount rate for the discounted
cash flow model, the Company used a modified capital asset pricing model that develops a rate of return utilizing a risk-free rate
and equity risk premium resulting in a discount rate of 12.0%. This approach also includes adjustments for the industry the Company
operates in and size of the Company. In addition, assumptions used by the Company in its discounted cash flow model (income approach)
included an average annual net income growth rate that approximated 23%; an asset growth of 4.4% in years one through five; net
interest margin ranging from 4.02% in the base year to 4.24% in year five; and a return on assets that ranged from 0.62% to 1.24%.
In applying the market approach method,
the Company considered all banks that announced a sale between January 1, 2013 and June 30, 2014, with total assets under $5 billion
and a return on assets greater than zero. This resulted in selecting 24 institutions which fit these criteria. After selecting
these institutions, the Company derived the fair value of the reporting unit by completing a comparative analysis of the relationship
between their financial metrics listed above and their market values utilizing various market multiples. Focus was placed
on the price to tangible book value of equity multiple as this multiple generally reflects returns on the capital employed within
the industry and is generally correlated with the profitability of each individual company.
The Company concluded its reporting unit
had a fair value of $8.50 per share, or $86.6 million, after giving similar consideration to the values derived from 1) the market
approach of $8.20 per share weighted at 80%, and 2) the income approach of $9.67 per share million weighted at 20%. This estimate
compares to a carrying value of its reporting unit of $70.9 million. Accordingly, following step one of the Company’s goodwill
impairment test, the Company concluded that its reporting unit’s fair value exceeded its carrying value and no goodwill impairment
existed.
Even though the Company determined that
there was no goodwill impairment, a future impairment charge may be necessary if our stock price declines, market values of others
in the financial industry decrease, the Bank’s revenue falls, or there are significant adverse changes in the operating environment
for the financial industry.
New Accounting Pronouncements. For a discussion of new
accounting pronouncements and their impact on the Company, see Note 1 of the Notes to the audited consolidated financial statements
included in Item 15 of this report.
ASSET AND LIABILITY MANAGEMENT
The largest component of the Company's
earnings is net interest income. Interest income and interest expense are affected by general economic conditions, competition
in the market place, market interest rates and repricing and maturity characteristics of the Company's assets and liabilities.
Exposure to interest rate risk is primarily a function of differences between the maturity and repricing schedules of assets (principally
loans and investment securities) and liabilities (principally deposits). Assets and liabilities are described as interest rate
sensitive for a given period of time when they mature or can reprice within that period. The difference between the amount of interest
sensitive assets and interest sensitive liabilities is referred to as the interest sensitivity "GAP" for any given period.
The "GAP" may be either positive or negative. If positive, more assets reprice than liabilities. If negative, the reverse
is true.
Certain shortcomings are inherent in the
interest sensitivity "GAP" method of analysis. Complexities such as prepayment risk and customer responses to interest
rate changes are not taken into account in the "GAP" analysis. Accordingly, management also utilizes a net interest income
simulation model to measure interest rate sensitivity. Simulation modeling gives a broader view of net interest income variability,
by providing various rate shock exposure estimates. Management regularly reviews the interest rate risk position and provides measurement
reports to the Board of Directors.
The following table shows the dollar amount
of interest sensitive assets and interest sensitive liabilities at December 31, 2014 and differences between them for the maturity
or repricing periods indicated.
| At December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Due after |
|
|
|
|
|
|
|
| |
|
Due in one |
|
|
one through |
|
|
Due after |
|
|
|
|
| |
|
year or less |
|
|
five years |
|
|
five years |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans, including loans held for sale |
|
$ |
223,655 |
|
|
$ |
300,517 |
|
|
$ |
44,713 |
|
|
$ |
568,885 |
|
| Investments and bank owned life insurance |
|
|
30,477 |
|
|
|
42,039 |
|
|
|
34,961 |
|
|
|
107,477 |
|
| Fed funds sold and interest bearing balances with bank |
|
|
18,982 |
|
|
|
- |
|
|
|
- |
|
|
|
18,982 |
|
| Federal home loan bank stock |
|
|
- |
|
|
|
- |
|
|
|
2,896 |
|
|
|
2,896 |
|
| Pacific coast bankers bank stock |
|
|
- |
|
|
|
- |
|
|
|
1,000 |
|
|
|
1,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total interest earnings assets |
|
$ |
273,114 |
|
|
$ |
342,556 |
|
|
$ |
83,570 |
|
|
$ |
699,240 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest bearing demand deposits |
|
$ |
151,131 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
151,131 |
|
| Savings and money market deposits |
|
|
203,480 |
|
|
|
- |
|
|
|
- |
|
|
|
203,480 |
|
| Time deposits |
|
|
67,638 |
|
|
|
50,983 |
|
|
|
62 |
|
|
|
118,683 |
|
| Borrowings |
|
|
|
|
|
|
10,000 |
|
|
|
1,453 |
|
|
|
11,453 |
|
| Junior subordinated debentures |
|
|
- |
|
|
|
- |
|
|
|
13,403 |
|
|
|
13,403 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total interest bearing liabilities |
|
$ |
422,249 |
|
|
$ |
60,983 |
|
|
$ |
14,918 |
|
|
$ |
498,150 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest rate sensitivity GAP |
|
$ |
(149,135 |
) |
|
$ |
281,573 |
|
|
$ |
68,652 |
|
|
$ |
201,090 |
|
| Cumulative interest rate sensitivity GAP |
|
|
|
|
|
|
132,438 |
|
|
|
201,090 |
|
|
|
|
|
| Cumulative interest rate sensitivity GAP as a % of earnings assets |
|
|
|
|
|
|
21.51 |
% |
|
|
28.76 |
% |
|
|
|
|
Effects of Changing Prices.
The results of operations and financial condition presented in this report are based on historical cost information, and are not
adjusted for the effects of inflation. Since the assets and liabilities of financial institutions are primarily monetary in nature,
the performance of the Company is affected more by changes in interest rates than by inflation. Interest rates generally increase
as the rate of inflation increases, but the magnitude of the change in rates may not be the same.
The effects of inflation on financial institutions
are normally not as significant as its influence on businesses which have investments in plants and inventories. During periods
of high inflation there are normally corresponding increases in the money supply, and financial institutions will normally experience
above-average growth in assets, loans and deposits. Inflation does increase the price of goods and services, and therefore operating
expenses increase during inflationary periods.
| ITEM 8. | Financial Statements and Supplementary Data |
Information required for this item is included in Item 15 of
this report.
| ITEM 9. | Changes in and disagreements with accountants on accounting
and financial disclosure |
None.
| ITEM 9A. | Controls and Procedures |
Disclosure Controls and Procedures.
Our management has evaluated, with the participation and under the supervision of our chief executive officer (CEO) and chief
financial officer (CFO), the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO have concluded
that, as of such date, the Company's disclosure controls and procedures are effective in ensuring that information relating to
the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act
is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) accumulated
and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Management's Report on Internal Control
Over Financial Reporting. The Company's management is responsible for establishing and maintaining adequate internal control
over financial reporting. The Company's internal control system is designed to provide reasonable assurance to our management and
the board of directors regarding the preparation and fair presentation of published financial statements. Nonetheless, all internal
control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, including the possibility
of collusion or improper management override of controls, material misstatements due to error or fraud may occur and not be detected.
Even systems determined to be effective as of a particular date can provide only reasonable assurance with respect to financial
statement preparation and presentation and may not eliminate the need for restatements.
The Company's management assessed the effectiveness
of the Company's internal control over financial reporting as of December 31, 2014. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated
Framework (1992). Based on our assessment, we believe that, as of December 31, 2014, the Company's internal control over financial
reporting is effective based on those criteria.
Changes in Internal Control Over Financial
Reporting. There have not been any changes in the Company's internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the Company's fiscal quarter ended December 31, 2014 that have
materially affected, or are reasonable likely to materially affect, the Company's internal control over financial reporting.
| ITEM 9B. | Other Information |
None.
Part III
| ITEM 10. | Directors and Executive Officers of the Registrant |
Information concerning directors and executive
officers requested by this item is contained in the Company's Proxy Statement for its 2015 annual meeting of shareholders to be
held on April 29, 2015 (2015 Proxy Statement), in the sections entitled "CURRENT EXECUTIVE OFFICERS," "PROPOSAL
NO. 1 – ELECTION OF DIRECTORS," and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" and is incorporated
into this report by reference.
The Board of Directors adopted a Code of
Ethics for the Company's executive officers that requires the Company's officers to maintain the highest standards of professional
conduct. A copy of the Executive Officer Code of Ethics is available on the Company's Web site www.bankofthepacific.com
under the link for Investor Info and Governance Documents.
The Company has a separately designated
Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The committee is composed of Directors
John Van Dijk, Gary C. Forcum, Dan J. Tupper, Randy Rust, and Dwayne Carter. Messrs. Forcum, Tupper, Rust and Carter are independent
applying the definition of independence for audit committee members found in the Nasdaq listing standards. Director John Van Dijk
is considered independent per the Exchange Act rules, but he is not independent under the Nasdaq listing standards.
The Company's Board of Directors has determined
that Gary C. Forcum, Randy Rust and John Van Dijk are audit committee financial experts as defined in Item 401(h) of the SEC's
Regulation S-K.
| ITEM 11. | Executive Compensation |
Information concerning executive and director
compensation and certain matters regarding participation in the Company's compensation committee required by this item is contained
in the registrant's 2015 Proxy Statement in the sections entitled "DIRECTOR COMPENSATION FOR 2014" and "EXECUTIVE
COMPENSATION," and is incorporated into this report by reference.
| ITEM 12. | Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Information concerning security ownership
of certain beneficial owners and management requested by this item is incorporated by reference to the material contained in the
registrant's 2015 Proxy Statement in the section entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"
and under the caption "Equity Compensation Plan Information" in the section entitled "EXECUTIVE COMPENSATION."
| ITEM 13. | Certain Relationships and Related Transactions, and
Director Independence |
Information concerning certain relationships
and related transactions requested by this item is contained in the registrant's 2015 Proxy Statement in the section "RELATED
PERSON TRANSACTIONS" and is incorporated into this report by reference. The current members of the Compensation and Management
Development Committee, who were also members throughout 2014, are Douglas Schermer (Chair), John Van Dijk, Gary Forcum and Randy
Rognlin.
Information concerning director independence
requested by this item is contained in the registrant's 2015 Proxy Statement in the section entitled "PROPOSAL NO. 1 –
ELECTION OF DIRECTORS" and is incorporated into this report by reference.
| ITEM 14. | Principal Accountant Fees and Services |
Information concerning fees paid to our
independent public accountants required by this item is included under the heading "AUDITORS – Fees Paid to Auditors"
in the registrant's 2015 Proxy Statement and is incorporated into this report by reference.
Part IV
| ITEM 15. | Exhibits and Financial Statement Schedules |
| |
(a) |
(1) The following financial statements are filed below: |
Report of Independent Registered
Public Accounting Firm – BDO USA LLP
Report of Independent Registered
Public Accounting Firm – Deloitte & Touche LLP
Consolidated Balance Sheets
Consolidated Statements of
Income
Consolidated Statements of
Comprehensive Income
Consolidated Statements of
Shareholders' Equity
Consolidated Statements of
Changes in Cash Flows
Notes to Consolidated Financial
Statements
| |
(a) |
(3) Exhibits: See Exhibit Index immediately following the signature page. |
Report
of Independent Registered Public Accounting Firm
Board
of Directors and Shareholders
Pacific
Financial Corporation
Aberdeen,
Washington
We
have audited the accompanying consolidated balance sheet of Pacific Financial Corporation as of December 31, 2014 and the related
consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for the period ended December
31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audit provides a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Pacific Financial Corporation at December 31, 2014, and the results of its operations and its cash flows for the period ended
December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/
BDO USA LLP
Spokane, Washington
March 26, 2015
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Pacific Financial Corporation
Aberdeen, Washington
We have audited the accompanying consolidated balance sheet
of Pacific Financial Corporation and subsidiary (the “Company”) as of December 31, 2013, and the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash flows for each of the two years in the period ended
December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Pacific Financial Corporation and subsidiary as of December 31, 2013,
and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2013, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Portland, Oregon
March 21, 2014
PACIFIC FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except
per share data)
| | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | |
| ASSETS | |
| | | |
| | |
| Cash and cash equivalents: | |
| | | |
| | |
| Cash and due from banks | |
$ | 14,782 | | |
$ | 12,214 | |
| Interest-bearing deposits in banks | |
| 16,255 | | |
| 23,734 | |
| Total cash and cash equivalents | |
| 31,037 | | |
| 35,948 | |
| Interest-bearing certificates of deposit (original maturities greater than 90 days) | |
| 2,727 | | |
| 2,727 | |
| Federal Home Loan Bank stock, at cost | |
| 2,896 | | |
| 3,013 | |
| Pacific Coast Bankers' Bank stock, at cost | |
| 1,000 | | |
| - | |
| Investment securities: | |
| | | |
| | |
| Investment securities available-for-sale, at fair market value (amortized cost of $86,907 and $97,536) | |
| 87,440 | | |
| 96,144 | |
| Investment securities held-to-maturity, at amortized cost (fair value of $1,852 and $2,158) | |
| 1,829 | | |
| 2,132 | |
| Total investment securities | |
| 89,269 | | |
| 98,276 | |
| | |
| | | |
| | |
| Loans held-for-sale | |
| 5,786 | | |
| 7,765 | |
| Loans, net of deferred loan fees | |
| 563,099 | | |
| 504,666 | |
| Allowance for loan losses | |
| (8,353 | ) | |
| (8,359 | ) |
| Loans, net | |
| 554,746 | | |
| 496,307 | |
| | |
| | | |
| | |
| Premises and equipment, net of accumulated depreciation and amortization | |
| 16,303 | | |
| 16,790 | |
| Other real estate owned and foreclosed assets | |
| 999 | | |
| 2,771 | |
| Accrued interest receivable | |
| 2,348 | | |
| 2,307 | |
| Cash surrender value of life insurance | |
| 18,742 | | |
| 18,237 | |
| Goodwill | |
| 12,168 | | |
| 12,168 | |
| Other intangible assets | |
| 1,439 | | |
| 1,481 | |
| Other assets | |
| 5,347 | | |
| 7,249 | |
| | |
| | | |
| | |
| TOTAL ASSETS | |
$ | 744,807 | | |
$ | 705,039 | |
| | |
| | | |
| | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | |
| | | |
| | |
| LIABILITIES | |
| | | |
| | |
| Deposits: | |
| | | |
| | |
| Demand | |
$ | 165,760 | | |
$ | 145,028 | |
| Interest-bearing demand and savings | |
| 354,611 | | |
| 336,260 | |
| Time deposits | |
| 118,683 | | |
| 126,059 | |
| Total deposits | |
| 639,054 | | |
| 607,347 | |
| Accrued interest payable | |
| 145 | | |
| 167 | |
| Short-term borrowings | |
| - | | |
| - | |
| Long-term borrowings | |
| 11,453 | | |
| 10,000 | |
| Junior subordinated debentures | |
| 13,403 | | |
| 13,403 | |
| Other liabilities | |
| 8,269 | | |
| 6,985 | |
| Total liabilities | |
| 672,324 | | |
| 637,902 | |
| | |
| | | |
| | |
| SHAREHOLDERS' EQUITY | |
| | | |
| | |
| | |
| | | |
| | |
| Preferred Stock, par value none 5,000,000 shares authorized, none outstanding | |
| - | | |
| - | |
| Common Stock, par value $125,000,000 shares authorized, 10,371,460 shares issued and outstanding at 12/31/2014 and 10,182,083 at 12/31/2013 | |
| 10,371 | | |
| 10,182 | |
| Additional paid-in-capital | |
| 42,991 | | |
| 41,817 | |
| Retained earnings | |
| 19,256 | | |
| 16,507 | |
| Accumulated other comprehensive loss | |
| (135 | ) | |
| (1,369 | ) |
| Total shareholders' equity | |
| 72,483 | | |
| 67,137 | |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | |
$ | 744,807 | | |
$ | 705,039 | |
See accompanying
notes.
PACIFIC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except
per Share Data)
| | |
For the Year Ended | |
| | |
December 31, | | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | | |
2012 | |
| INTEREST AND DIVIDEND INCOME | |
| | | |
| | | |
| | |
| Loans | |
$ | 26,937 | | |
$ | 24,401 | | |
$ | 25,635 | |
| Deposits in banks and federal funds sold | |
| 89 | | |
| 114 | | |
| 84 | |
| Securities available for sale: | |
| | | |
| | | |
| | |
| Taxable | |
| 1,261 | | |
| 769 | | |
| 756 | |
| Tax-exempt | |
| 749 | | |
| 798 | | |
| 711 | |
| Securities held to maturity: | |
| | | |
| | | |
| | |
| Taxable | |
| 8 | | |
| 10 | | |
| 14 | |
| Tax-exempt | |
| 81 | | |
| 198 | | |
| 295 | |
| FHLB & PCBB dividends | |
| 33 | | |
| - | | |
| - | |
| | |
| | | |
| | | |
| | |
| Total interest and dividend income | |
| 29,158 | | |
| 26,290 | | |
| 27,495 | |
| | |
| | | |
| | | |
| | |
| INTEREST EXPENSE | |
| | | |
| | | |
| | |
| Deposits: | |
| | | |
| | | |
| | |
| Interest-bearing demand and savings | |
| 581 | | |
| 700 | | |
| 1,084 | |
| Time | |
| 1,087 | | |
| 1,320 | | |
| 1,798 | |
| Short-term borrowings | |
| 1 | | |
| 9 | | |
| 79 | |
| Long-term borrowings | |
| 215 | | |
| 214 | | |
| 217 | |
| Secured borrowings | |
| - | | |
| - | | |
| 20 | |
| Junior subordinated debentures | |
| 241 | | |
| 247 | | |
| 286 | |
| | |
| | | |
| | | |
| | |
| Total interest expense | |
| 2,125 | | |
| 2,490 | | |
| 3,484 | |
| | |
| | | |
| | | |
| | |
| Net interest income | |
| 27,033 | | |
| 23,800 | | |
| 24,011 | |
| | |
| | | |
| | | |
| | |
| LOAN LOSS PROVISION (RECAPTURE) | |
| 300 | | |
| (450 | ) | |
| (1,100 | ) |
| | |
| | | |
| | | |
| | |
| Net interest income after loan loss provision (recapture) | |
| 26,733 | | |
| 24,250 | | |
| 25,111 | |
| | |
| | | |
| | | |
| | |
| NON-INTEREST INCOME | |
| | | |
| | | |
| | |
| Service charges on deposit accounts | |
| 1,809 | | |
| 1,731 | | |
| 1,686 | |
| Net (loss) gain on sale of other real estate owned | |
| (207 | ) | |
| 40 | | |
| 331 | |
| Net gains from sales of loans | |
| 3,686 | | |
| 5,171 | | |
| 5,058 | |
| Net gains on sales of securities available for sale | |
| 88 | | |
| 405 | | |
| 303 | |
| Net other-than-temporary impairment | |
| (48 | ) | |
| (37 | ) | |
| (333 | ) |
| Earnings on bank owned life insurance | |
| 505 | | |
| 452 | | |
| 510 | |
| Other operating income | |
| 2,246 | | |
| 2,193 | | |
| 1,836 | |
| | |
| | | |
| | | |
| | |
| Total non-interest income | |
| 8,079 | | |
| 9,955 | | |
| 9,391 | |
| | |
| | | |
| | | |
| | |
| NON-INTEREST EXPENSE | |
| | | |
| | | |
| | |
| Salaries and employee benefits | |
| 17,118 | | |
| 17,013 | | |
| 16,215 | |
| Occupancy | |
| 2,006 | | |
| 1,839 | | |
| 1,673 | |
| Equipment | |
| 1,050 | | |
| 860 | | |
| 801 | |
| Data processing | |
| 2,009 | | |
| 2,268 | | |
| 1,607 | |
| Professional services | |
| 745 | | |
| 935 | | |
| 750 | |
| Other real estate owned write-downs | |
| 67 | | |
| 946 | | |
| 1,314 | |
| Other real estate owned operating costs | |
| 238 | | |
| 408 | | |
| 550 | |
| State taxes | |
| 417 | | |
| 458 | | |
| 518 | |
| FDIC and state assessments | |
| 491 | | |
| 535 | | |
| 610 | |
| Other non-interest expense | |
| 4,014 | | |
| 4,240 | | |
| 4,379 | |
| | |
| | | |
| | | |
| | |
| Total non-interest expense | |
| 28,155 | | |
| 29,502 | | |
| 28,417 | |
| | |
| | | |
| | | |
| | |
| INCOME BEFORE PROVISION FOR INCOME TAXES | |
| 6,657 | | |
| 4,703 | | |
| 6,085 | |
| | |
| | | |
| | | |
| | |
| PROVISION FOR INCOME TAXES | |
| 1,730 | | |
| 972 | | |
| 1,300 | |
| Effective Tax Rate | |
| 25.99 | % | |
| 20.67 | % | |
| 21.36 | % |
| | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| NET INCOME APPLICABLE TO COMMON SHAREHOLDERS | |
$ | 4,927 | | |
$ | 3,731 | | |
$ | 4,785 | |
| | |
| | | |
| | | |
| | |
| EARNINGS PER COMMON SHARE: | |
| | | |
| | | |
| | |
| BASIC | |
$ | 0.48 | | |
$ | 0.37 | | |
$ | 0.47 | |
| DILUTED | |
$ | 0.48 | | |
$ | 0.37 | | |
$ | 0.47 | |
| | |
| | | |
| | | |
| | |
| WEIGHTED AVERAGE SHARES OUTSTANDING: | |
| | | |
| | | |
| | |
| BASIC | |
| 10,256,242 | | |
| 10,121,738 | | |
| 10,121,853 | |
| DILUTED | |
| 10,347,338 | | |
| 10,189,888 | | |
| 10,126,244 | |
See accompanying notes.
PACIFIC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(Dollars in Thousands)
| | |
For the Year Ended | |
| | |
December 31, | | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | | |
2012 | |
| | |
| | |
| | |
| |
| NET INCOME | |
$ | 4,927 | | |
$ | 3,731 | | |
$ | 4,785 | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | |
| | | |
| | | |
| | |
| Change in fair value of securities available-for-sale | |
| 1,269 | | |
| (1,875 | ) | |
| 536 | |
| Defined benefit plan | |
| (35 | ) | |
| 85 | | |
| 130 | |
| Total other comprehensive income (loss), net of tax | |
| 1,234 | | |
| (1,790 | ) | |
| 666 | |
| COMPREHENSIVE INCOME | |
$ | 6,161 | | |
$ | 1,941 | | |
$ | 5,451 | |
See accompanying
notes.
PACIFIC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Dollars in Thousands, Except
Share Amounts)
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| | |
Common Stock | | |
| | |
| | |
Other | | |
Total | |
| | |
Shares | | |
Amount | | |
Additional
Paid-in Capital | | |
Retained
Earnings | | |
Comprehensive
Income/(Loss) | | |
Shareholders'
Equity | |
| BALANCE - December 31, 2011 | |
| 10,121,853 | | |
$ | 10,122 | | |
$ | 41,342 | | |
$ | 12,051 | | |
$ | (245 | ) | |
$ | 63,270 | |
| Net income | |
| - | | |
| - | | |
| - | | |
| 4,785 | | |
| - | | |
| 4,785 | |
| Other comprehensive income, net of tax | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Unrealized holding gain on securities less reclassification adjustments for net gains included in net income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 536 | | |
| 536 | |
| Amortization of unrecognized prior service costs and net gains | |
| - | | |
| - | | |
| - | | |
| - | | |
| 130 | | |
| 130 | |
| Dividend paid ($0.20 per share) | |
| - | | |
| - | | |
| - | | |
| (2,024 | ) | |
| - | | |
| (2,024 | ) |
| Stock-based compensation expense | |
| - | | |
| - | | |
| 24 | | |
| - | | |
| - | | |
| 24 | |
| BALANCE - December 31, 2012 | |
| 10,121,853 | | |
$ | 10,122 | | |
$ | 41,366 | | |
$ | 14,812 | | |
$ | 421 | | |
$ | 66,721 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| - | | |
| - | | |
| - | | |
| 3,731 | | |
| - | | |
| 3,731 | |
| Other comprehensive income, net of tax | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Unrealized holding loss on securities less reclassification adjustments for net gains included in net income | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,875 | ) | |
| (1,875 | ) |
| Amortization of unrecognized prior service costs and net gains | |
| - | | |
| - | | |
| - | | |
| - | | |
| 85 | | |
| 85 | |
| Issuance of common stock | |
| 60,230 | | |
| 60 | | |
| 334 | | |
| - | | |
| - | | |
| 394 | |
| Dividend declared ($0.20 per share) | |
| - | | |
| - | | |
| - | | |
| (2,036 | ) | |
| - | | |
| (2,036 | ) |
| Stock-based compensation expense | |
| - | | |
| - | | |
| 117 | | |
| - | | |
| - | | |
| 117 | |
| BALANCE - December 31, 2013 | |
| 10,182,083 | | |
$ | 10,182 | | |
$ | 41,817 | | |
$ | 16,507 | | |
$ | (1,369 | ) | |
$ | 67,137 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| - | | |
| - | | |
| - | | |
| 4,927 | | |
| - | | |
| 4,927 | |
| Other comprehensive income, net of tax | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Unrealized holding gain on securities less reclassification adjustments for net gains included in net income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,269 | | |
| 1,269 | |
| Amortization of unrecognized prior service costs and net gains | |
| - | | |
| - | | |
| - | | |
| - | | |
| (35 | ) | |
| (35 | ) |
| Issuance of common stock | |
| 189,377 | | |
| 189 | | |
| 1,035 | | |
| - | | |
| - | | |
| 1,224 | |
| Dividend declared ($0.21 per share) | |
| - | | |
| - | | |
| - | | |
| (2,178 | ) | |
| - | | |
| (2,178 | ) |
| Stock-based compensation expense | |
| - | | |
| - | | |
| 139 | | |
| - | | |
| - | | |
| 139 | |
| BALANCE - December 31, 2014 | |
| 10,371,460 | | |
$ | 10,371 | | |
$ | 42,991 | | |
$ | 19,256 | | |
$ | (135 | ) | |
$ | 72,483 | |
See accompanying
notes.
PACIFIC FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars
in Thousands)
| | |
For the Year Ended | | |
| |
| | |
December 31, | | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | | |
2012 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| | | |
| | |
| Net Income | |
$ | 4,927 | | |
$ | 3,731 | | |
$ | 4,785 | |
| Adjustments to reconcile net income to net cash from operating activities | |
| | | |
| | | |
| | |
| Provision for (recapture of) credit losses | |
| 300 | | |
| (450 | ) | |
| (1,100 | ) |
| Depreciation and amortization | |
| 2,538 | | |
| 2,328 | | |
| 1,491 | |
| Deferred income taxes | |
| 727 | | |
| 386 | | |
| 63 | |
| Originations of loans held for sale | |
| (150,899 | ) | |
| (225,068 | ) | |
| (251,435 | ) |
| Proceeds from sales of loans held for sale | |
| 155,846 | | |
| 234,194 | | |
| 256,720 | |
| Net gain on sales of loans | |
| (3,546 | ) | |
| (5,171 | ) | |
| (5,058 | ) |
| Net gain on sales of securities available for sale | |
| (88 | ) | |
| (405 | ) | |
| (303 | ) |
| Net OTTI recognized in earnings | |
| 48 | | |
| 37 | | |
| 333 | |
| Loss (gain) on sales of other real estate owned | |
| 207 | | |
| (40 | ) | |
| (331 | ) |
| (Gain) loss on sale of premises and equipment | |
| (2 | ) | |
| 36 | | |
| (6 | ) |
| Earnings on bank owned life insurance | |
| (505 | ) | |
| (452 | ) | |
| (510 | ) |
| (Increase) decrease in accrued interest receivable | |
| (41 | ) | |
| (228 | ) | |
| 77 | |
| Decrease in accrued interest payable | |
| (22 | ) | |
| (48 | ) | |
| (1,277 | ) |
| Other real estate owned write-downs | |
| 67 | | |
| 946 | | |
| 1,314 | |
| Additions to other real estate owned | |
| - | | |
| - | | |
| (185 | ) |
| Decrease in prepaid expenses | |
| 12 | | |
| 2,157 | | |
| 374 | |
| –Other operating activities | |
| 1,791 | | |
| 1,003 | | |
| 288 | |
| | |
| | | |
| | | |
| | |
| Net cash provided by operating activities | |
| 11,360 | | |
| 12,956 | | |
| 5,240 | |
| | |
| | | |
| | | |
| | |
| CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | | |
| | |
| Net decrease (increase) in interest bearing balances with banks | |
| 7,479 | | |
| 18,953 | | |
| (14,162 | ) |
| Net decrease (increase) in certificates of deposits held for investment | |
| - | | |
| 258 | | |
| (2,985 | ) |
| Activity in securities available for sale: | |
| | | |
| | | |
| | |
| Sales | |
| 17,755 | | |
| 7,832 | | |
| 10,917 | |
| Maturities, prepayments and calls | |
| 8,623 | | |
| 11,265 | | |
| 10,451 | |
| Purchases | |
| (17,711 | ) | |
| (57,521 | ) | |
| (34,194 | ) |
| Activity in securities held to maturity: | |
| | | |
| | | |
| | |
| Maturities, prepayments and calls | |
| 303 | | |
| 4,804 | | |
| 286 | |
| Purchases | |
| - | | |
| - | | |
| (200 | ) |
| Proceeds from sales of government loan pools | |
| 2,541 | | |
| 6,266 | | |
| 1,296 | |
| (Increase) decrease in loans made to customers, net of principal collections | |
| (60, 809 | ) | |
| (60,004 | ) | |
| 24,105 | |
| Purchases of premises and equipment | |
| (848 | ) | |
| (2,728 | ) | |
| (844 | ) |
| Proceeds from sales of other real estate owned | |
| 1,527 | | |
| 2,660 | | |
| 4,223 | |
| Cash received in acquisition, net of cash paid | |
| - | | |
| 31,941 | | |
| - | |
| | |
| | | |
| | | |
| | |
| Net cash used in investing activities | |
| (41,140 | ) | |
| (36,274 | ) | |
| (1,107 | ) |
| | |
| | | |
| | | |
| | |
| CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | | |
| | |
| Net increase in deposits | |
| 31,707 | | |
| 21,470 | | |
| 193 | |
| Net decrease in short-term borrowings | |
| - | | |
| (3,000 | ) | |
| - | |
| Decrease in secured borrowings | |
| - | | |
| - | | |
| (741 | ) |
| Proceeds from issuance of long-term debt | |
| 1,500 | | |
| 2,500 | | |
| 2,500 | |
| Repayments of long-term debt | |
| (47 | ) | |
| - | | |
| (2,500 | ) |
| Issuance of common stock | |
| 1,224 | | |
| 394 | | |
| - | |
| Cash dividends paid | |
| (2,036 | ) | |
| - | | |
| (2,024 | ) |
| | |
| | | |
| | | |
| | |
| Net cash provided by (used in) financing activities | |
| 32,348 | | |
| 21,364 | | |
| (2,572 | ) |
| | |
| | | |
| | | |
| | |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | |
| 2,568 | | |
| (1,954 | ) | |
| 1,561 | |
| CASH AND DUE FROM BANKS - BEGINNING OF THE PERIOD | |
| 12,214 | | |
| 14,168 | | |
| 12,607 | |
| CASH AND DUE FROM BANKS - END OF THE PERIOD | |
$ | 14,782 | | |
$ | 12,214 | | |
$ | 14,168 | |
| | |
| | | |
| | | |
| | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |
| | | |
| | | |
| | |
| Cash paid for interest | |
$ | 2,147 | | |
$ | 2,536 | | |
$ | 4,761 | |
| Cash paid for taxes | |
$ | 643 | | |
$ | 690 | | |
$ | 1,998 | |
| | |
| | | |
| | | |
| | |
| SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND | |
| | | |
| | | |
| | |
| FINANCING ACTIVITIES | |
| | | |
| | | |
| | |
| Change in fair value of securities available-for-sale, net of tax | |
$ | 920 | | |
$ | (1,875 | ) | |
$ | 536 | |
| Transfer of loans held for sale to loans held for investment | |
$ | 578 | | |
$ | 986 | | |
$ | 1,295 | |
| Other real estate owned acquired in settlement of loans | |
$ | (842 | ) | |
$ | (1,756 | ) | |
$ | (2,897 | ) |
| Reclass of current portion of long-term borrowings to short-term borrowings | |
$ | - | | |
$ | - | | |
$ | 3,000 | |
| Financed sale of other real estate owned | |
$ | 813 | | |
$ | 98 | | |
$ | 922 | |
See accompanying notes.
Pacific Financial Corporation and Subsidiary
December 31, 2014 and 2013 and for the
three years ended December 31, 2014, 2013 and 2012
Notes
to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts
NOTE 1 – ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Organization – Pacific Financial
Corporation (the “Company” or “Pacific”) is a bank holding company headquartered in Aberdeen, Washington.
The Company owns one banking subsidiary, Bank of the Pacific (the “Bank”), which is also headquartered in Washington.
The Company was incorporated in the State of Washington in February, 1997, pursuant to a holding company reorganization of the
Bank. The Company has two wholly owned subsidiaries, PFC Statutory Trust I and II (the Trusts), which do not meet the criteria
for consolidation, and therefore, are not consolidated in the Company’s financial statements. The Company was incorporated
in the State of Washington on February 12, 1997, pursuant to a holding company reorganization of the Bank.
The Company conducts its banking business
through the Bank, which operates 17 branches located in communities in Grays Harbor, Pacific, Whatcom, Clark, Skagit and Wahkiakum
counties in the state of Washington and three in Clatsop County, Oregon. In addition, the Bank operates two loan production offices
in Burlington and Dupont, Washington and has a residential real estate mortgage department. During second quarter 2013, the Bank
completed the acquisition of three branches from Sterling Savings Bank. Total deposits assumed were $37.6 million and loans acquired
totaled $4.0 million. Of the three branches purchased, two were consolidated into existing Pacific branches to maximize branch
efficiencies resulting in one new branch in Astoria, Oregon. Separately, the Company opened a full-service branch in Warrenton,
Oregon in October 2013 that further expands operations on the northern Oregon coast.
Basis of presentation – The
consolidated financial statements include the accounts of Pacific Financial Corporation and its wholly-owned subsidiary. All intercompany
accounts and transactions have been eliminated in consolidation.
The interim consolidated financial statements
are not audited, but include all adjustments that Management considers necessary for a fair presentation of consolidated financial
condition and results of operations for the interim periods presented.
Method of accounting and use of estimates
– The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted
in the United States of America and prevailing practices within the banking industry. This requires Management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting periods.
Actual results could differ from those estimates. Significant estimates made by Management involve the calculation of the allowance
for loan losses, impaired loans, the fair value of available-for-sale investment securities, deferred tax assets, and the value
of other real estate owned and foreclosed assets.
The Company utilizes the accrual method
of accounting, which recognizes income when earned and expenses when incurred.
In preparing these financial statements,
the Company has evaluated events and transactions subsequent to December 31, 2014, for potential recognition or disclosure in the
financial statements. In Management’s opinion, all accounting adjustments necessary to accurately reflect the financial position
and results of operations on the accompanying financial statements have been made. These adjustments include normal and recurring
accruals considered necessary for a fair and accurate presentation.
Securities Available for Sale –
Securities available for sale consist of debt securities that the Company intends to hold for an indefinite period, but not necessarily
to maturity. Securities available for sale are reported at fair value. Unrealized gains and losses, net of the related deferred
tax effect, are reported net as a separate component of shareholders' equity entitled “accumulated other comprehensive income
(loss).” Realized gains and losses on securities available for sale, determined using the specific identification method,
are included in earnings. Amortization of premiums and accretion of discounts are recognized in interest income over the period
to maturity. For mortgage-backed securities, actual maturity may differ from contractual maturity due to principal payments and
amortization of premiums and accretion of discounts may vary due to prepayment speed assumptions.
Securities Held to Maturity —
Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts, which are recognized in interest income over the period to maturity.
Declines in the fair value of individual
securities held to maturity and available for sale that are deemed to be other than temporary are reflected in earnings when identified.
Management evaluates individual securities for other than temporary impairment (“OTTI”) on a quarterly basis. OTTI
is separated into a credit and noncredit component. Noncredit component losses are recorded in other comprehensive income (loss)
when the Company a) does not intend to sell the security or b) is not more likely than not it will be required to sell the security
prior to the security’s anticipated recovery. Credit component losses are reported in non-interest income.
Federal Home Loan Bank Stock —
The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost. The Company is required
to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets
or FHLB advances.
The Company views its investment in the
FHLB stock as a long-term investment. Based on the Company’s evaluation of the underlying investment, including the long-term
nature of the investment, the liquidity position of the FHLB, the actions being taken by the FHLB to address its regulatory situation
and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the par value, the
Company does not believe its investment with the FHLB is impaired. Even though the Company did not determine its investment in
the FHLB stock was impaired at December 31, 2014, future deterioration of the FHLB’s financial condition may result in future
impairment losses.
Pacific Coast Bankers Bank Stock —
The Company’s investment in Pacific Coast Bankers Bank (“PCBB”) stock is carried at cost.
Loans Held for Sale — Mortgage
loans originated for sale in the foreseeable future in the secondary market are carried at the lower of aggregate cost or
estimated fair value. Gains and losses on sales of loans are recognized at settlement date and are determined by the difference
between the sales proceeds and the carrying value of the loans. Net unrealized losses are recognized through a valuation allowance
established by charges to income. Loans held for sale that are unable to be sold in the secondary market are transferred to loans
receivable when identified.
Loans Receivable — Loans receivable
that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their
outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated
loans, and unamortized premiums or discounts on purchased loans. Loan fees and certain direct loan origination costs are deferred,
and the net fee or cost is recognized as an adjustment of yield over the contractual life of the related loans using the effective
interest method.
Interest income on loans is accrued over
the term of the loans based upon the principal outstanding. The accrual of interest on loans is discontinued when, in management’s
opinion, the borrower may be unable to meet payments as they come due. When interest accrual is discontinued, all unpaid accrued
interest is reversed against interest income. Interest income is subsequently recognized only to the extent that cash payments
are received until, in management’s judgment, the borrower has the ability to make contractual interest and principal payments,
in which case the loan is returned to accrual status.
Allowance for loan losses — The
allowance for loan losses is established through a provision that is charged to earnings as probable losses are incurred. Losses
are charged against the allowance when management believes the collectability of a loan balance is unlikely. Subsequent recoveries,
if any, are credited to the allowance.
The allowance for loan losses is evaluated
on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light
of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s
ability to repay, estimated value of underlying collateral and prevailing economic conditions. The evaluation is inherently subjective,
as it requires estimates that are susceptible to significant revision as more information becomes available. The Company’s
methodology for assessing the appropriateness of the allowance consists of several key elements, which includes a general formulaic
allowance and a specific allowance on impaired loans. The formulaic portion of the general credit loss allowance is established
by applying a loss percentage factor to the different loan types based on historical loss experience adjusted for qualitative factors.
A loan is considered impaired when, based
on current information and events, it is probable the Company will be unable to collect principal and interest when due according
to the contractual terms of the original loan agreement. Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls are generally not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding
the loan and the borrowers, including the length of the delay, the reasons for the delay, the borrower’s prior payment record,
and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis
for commercial, construction and real estate loans by either the present value of the expected future cash flows discounted at
the loan’s effective interest rate, or the fair value of the collateral less estimated selling costs if the loan is collateral
dependent. When the net realizable value of an impaired loan is less than the book value of the loan, impairment is recognized
by adjusting the allowance for loan losses. Uncollected accrued interest is reversed against interest income. If ultimate collection
of principal is in doubt, all subsequent cash receipts including interest payments on impaired loans are applied to reduce the
principal balance.
For all portfolio segments, a restructuring
of a debt constitutes a troubled debt restructuring (“TDR”) if the Company grants a concession to the borrower for
economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Restructured
workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original
contractual terms. Loans or leases that are reported as TDRs are considered impaired and measured for impairment as described above.
Premises and Equipment — Premises
and equipment are stated at cost less accumulated depreciation, which is computed on the straight-line method over the estimated
useful lives of the assets. Asset lives range from 3 to 39 years. Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is less. Gains or losses on dispositions are reflected in earnings.
Other Real Estate Owned — Real
estate properties acquired through, or in lieu of, foreclosure are to be sold and are initially recorded at the fair value of the
properties less estimated costs of disposal. Any write-down to fair value at the time of transfer to other real estate owned (“OREO”)
is charged to the allowance for loan losses. Properties are evaluated regularly to ensure that the recorded amounts are supported
by their current fair values, and that write-downs to reduce the carrying amounts to fair value less estimated costs to dispose
are recorded as necessary. Any subsequent reductions in carrying values, and revenue and expense from the operations of properties,
are charged to operations.
Goodwill and other intangible assets
— At December 31, 2014 the Company had $13,607 in goodwill and other intangible assets. Goodwill is initially recorded
when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible
assets acquired. Goodwill is not amortized but is reviewed for potential impairment during the second quarter on an annual basis
or more frequently if events or circumstances indicate a potential impairment, at the reporting unit level. The Company has one
reporting unit, the Bank, for purposes of computing goodwill. The analysis of potential impairment of goodwill requires a two-step
process. The first step is a comparison of the reporting unit’s fair value to its carrying value. If the reporting unit’s
fair value is less than its carrying value, the Company would be required to progress to the second step. In the second step the
Company calculates the implied fair value of its reporting unit. The Company compares the implied fair value of goodwill to the
carrying amount of goodwill on the Company’s balance sheet. If the carrying amount of the goodwill is greater
than the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to that excess. The
implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. The
estimated fair value of the Company is allocated to all of the Company’s individual assets and liabilities, including any
unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination and the estimated fair
value of the Company is the price paid to acquire it. The allocation process is performed only for purposes of determining the
amount of goodwill impairment, as no assets or liabilities are written up or down, nor are any additional unrecognized identifiable
intangible assets recorded as a part of this process.
The results of the Company’s annual
impairment test determined the reporting unit’s fair value exceeded its carrying value and no goodwill impairment existed.
As of December 31, 2014 management determined there were no events or circumstances which would more likely than not reduce the
fair value of its reporting unit below its carrying value. No assurance can be given that the Company will not record an impairment
loss on goodwill in the future.
Core deposit intangibles are amortized
to non-interest expenses using an accelerated method over ten years. Net unamortized core deposit intangible totaled $171 and $213
at December 31, 2014 and 2013, respectively. Amortization expense related to core deposit intangible totaled $43 and $28 during
the years ended December 31, 2014 and 2013, respectively.
In 2006, the Bank completed a deposit transfer
and assumption transaction with an Oregon-based bank for a $1,268 premium. In connection with completion of the transaction,
the Oregon Department of Consumer and Business Services issued a Certificate of Authority to the Bank authorizing it to conduct
a banking business in the State of Oregon. The premium, and the resultant right to conduct business in Oregon, is recorded
as an indefinite-lived intangible asset.
Impairment of long-lived assets —
Management periodically reviews the carrying value of its long-lived assets to determine if an impairment has occurred or whether
changes in circumstances have occurred that would require a revision to the remaining useful life, of which there have been none.
In making such determination, management evaluates the performance, on an undiscounted basis, of the underlying operations or assets
which give rise to such amount.
Transfers of Financial Assets —
Transfers of financial assets, including cash, investment securities, loans and loans held for sale, are accounted for as sales
when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage
of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred
assets through either an agreement to repurchase them before their maturity, or the ability to cause the buyer to return specific
assets.
Income Taxes — Deferred tax
assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of assets and
liabilities, and are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. Deferred tax assets are reduced by a valuation allowance when management
determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
The Company files a consolidated federal
income tax return. The Bank provides for income taxes separately and remits to the Company amounts currently due in accordance
with a tax allocation agreement between the Company and the Bank.
As of December 31, 2014, the Company had
no unrecognized tax benefits. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in
“Income Taxes” in the consolidated statements of income. There were no amounts related to interest and penalties recognized
for the year ended December 31, 2014. The tax years that remain subject to examination by federal and state taxing authorities
are the years ended December 31, 2013, 2012 and 2011.
Stock-Based Compensation — Accounting
guidance requires measurement of compensation cost for all stock based awards based on the grant date fair value and recognition
of compensation cost over the service period of stock based awards. The fair value of stock options is determined using the Black-Scholes
valuation model. The Company’s stock compensation plans are described more fully in Note 15.
Cash Equivalents and Cash Flows —
The Company considers all amounts included in the balance sheet caption “Cash and due from banks” to be cash equivalents.
Cash and cash equivalents have a maturity of 90 days or less at the time of purchase. Cash flows from loans, interest bearing deposits
in banks, federal funds sold, short-term borrowings, secured borrowings and deposits are reported net. The Company maintains balances
in depository institution accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses
in such accounts.
Certificates of Deposit Held for Investment
— Certificates of deposit held for investments include amounts invested with financial institutions for a stated interest
rate and maturity date. Early withdraw penalties apply, however the Company plans to hold these investments to maturity.
Earnings Per Share — Basic
earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding.
Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise
of options under the Company’s stock option plans. Stock options excluded from the calculation of diluted earnings per share
because they are antidilutive, were 361,545, 436,495, and 532,106 in 2014, 2013 and 2012, respectively. Outstanding warrants also
excluded were 0, 638,920, and 699,642 for the years ended 2014, 2013, and 2012, respectively.
Comprehensive Income — Recognized
revenue, expenses, gains and losses are included in net income. Certain changes in assets and liabilities, such as prior service
costs and amortization of prior service costs related to defined benefit plans and unrealized gains and losses on securities available
for sale, are reported within equity in other accumulated comprehensive loss in the consolidated balance sheets. Such items, along
with net income, are components of comprehensive income. Gains and losses on securities available for sale are reclassified to
net income as the gains or losses are realized upon sale of the securities. Other-than-temporary impairment charges are reclassified
to net income at the time of the charge.
Business Segment — The Company
operates a single business segment. The financial information that is used by the chief operating decision maker in allocating
resources and assessing performance is only provided for one reportable segment as of December 31, 2014, 2013 and 2012.
Recent Accounting Pronouncements —
In July 2013, FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward,
a Similar Tax Loss, or a Tax Credit Carryforward Exists." The provisions of ASU No. 2013-11 require an entity to present
an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset
for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. ASU No. 2013-11
is effective for interim and annual reporting periods beginning after December 15, 2013. The disclosures required from adoption
of this ASU have been included in these financial statements.
In January 2014, FASB issued ASU 2014-04,
“Receivables –Troubled Debt Restructurings by Creditors – Reclassification of Residential Real Estate Collateralized
Consumer Mortgage Loans upon Foreclosure”. ASU 2014-04 clarifies when banks and similar
institutions (creditors) should reclassify mortgage loans collateralized by residential real estate properties from the loan portfolio
to other real estate owned (OREO). The ASU also requires certain interim and annual disclosures. ASU 2014-04 is effective for interim
and annual periods beginning after December 15, 2014. The Company does not anticipate that the adoption of this standard will have
a material effect on its financial statements.
In May 2014, FASB issued ASU 2014-09, “Revenue
from Contracts with Customers”. Under this Update, FASB created a new Topic 606 which is in response to a joint initiative
of FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop
a common revenue standard for U.S. GAAP and international financial reporting standards that would:
1. Remove inconsistencies and
weaknesses in revenue requirements.
2. Provide a more robust framework
for addressing revenue issues.
3. Improve comparability of revenue
recognition practices across entities, industries, jurisdictions, and capital markets.
4. Provide more useful information
to users of financial statements through improved disclosure requirements.
5. Simplify the preparation of
financial statements by reducing the number of requirements to which an entity must refer.
The amendments in this Update are effective for annual
reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application
is not permitted. The Company is currently evaluating the impact that this Update will have on its consolidated financial position,
results of operations or cash flows.
In August 2014, FASB issued ASU 2014-14,
“Receivables- Troubled Debt Restructurings by Creditors; Classification of Certain Government-Guaranteed Mortgage Loans
Upon Foreclosure”. This ASU will require creditors to derecognize certain foreclosed government-guaranteed mortgage loans
and to recognize a separate other receivable that is measured at the amount the creditor expects to recover from the guarantor,
and to treat the guarantee and the receivable as a single unit of account. ASU 2014-14 is effective for interim and annual periods
beginning after December 15, 2014. The Company does not anticipate that the adoption of this standard will have a material effect
on its financial statements.
NOTE 2 – RESTRICTED ASSETS
Federal Reserve Board regulations require
that the Bank maintain certain minimum reserve balances in cash on hand and on deposit with the Federal Reserve Bank, based on
a percentage of deposits. The average amount of such balances for the years ended December 31, 2014 and 2013 was approximately
$1,031 and $953, respectively.
NOTE 3 - SECURITIES
Investment securities consist principally
of short and intermediate term debt instruments issued by the U.S. Treasury, other U.S. government agencies, state and local governments,
other corporations, and mortgaged backed securities (“MBS”). Investment securities have been classified according to
management’s intent. The amortized cost of securities and their approximate fair value are as follows:
Investment securities at December 31, 2014 and December 31,
2013 consisted of the following:
(Dollars in Thousands)
| | |
December 31, 2014 | |
| | |
| | |
Gross | | |
Gross | | |
| |
| | |
Amortized | | |
unrealized | | |
unrealized | | |
Fair | |
| | |
cost | | |
gains | | |
losses | | |
value | |
| Available-for-sale: | |
| | | |
| | | |
| | | |
| | |
| Collateralized mortgage obligations: agency issued | |
$ | 38,949 | | |
$ | 236 | | |
$ | 418 | | |
$ | 38,767 | |
| Collateralized mortgage obligations: non-agency | |
| 535 | | |
| - | | |
| 8 | | |
| 527 | |
| Mortgage-backed securities: agency issued | |
| 12,325 | | |
| 39 | | |
| 165 | | |
| 12,199 | |
| U.S. Government and agency securities | |
| 7,977 | | |
| 111 | | |
| 32 | | |
| 8,056 | |
| State and municipal securities | |
| 27,121 | | |
| 850 | | |
| 80 | | |
| 27,891 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total available-for-sale | |
$ | 86,907 | | |
$ | 1,236 | | |
$ | 703 | | |
$ | 87,440 | |
| | |
| | | |
| | | |
| | | |
| | |
| Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
| Mortgage-backed securities: agency issued | |
$ | 123 | | |
$ | 12 | | |
$ | - | | |
$ | 135 | |
| State and municipal securities | |
| 1,706 | | |
| 11 | | |
| - | | |
| 1,717 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total held-to-maturity | |
$ | 1,829 | | |
$ | 23 | | |
$ | - | | |
$ | 1,852 | |
| | |
December 31, 2013 | |
| | |
| | |
Gross | | |
Gross | | |
| |
| | |
Amortized | | |
unrealized | | |
unrealized | | |
Fair | |
| | |
cost | | |
gains | | |
losses | | |
value | |
| Available-for-sale: | |
| | | |
| | | |
| | | |
| | |
| Collateralized mortgage obligations: agency issued | |
$ | 39,791 | | |
$ | 246 | | |
$ | 1,246 | | |
$ | 38,791 | |
| Collateralized mortgage obligations: non agency | |
| 2,251 | | |
| 3 | | |
| 243 | | |
| 2,011 | |
| Mortgage-backed securities: agency issued | |
| 13,671 | | |
| 21 | | |
| 303 | | |
| 13,389 | |
| U.S. Government agency securities | |
| 8,859 | | |
| 34 | | |
| 82 | | |
| 8,811 | |
| State and municipal securities | |
| 31,973 | | |
| 774 | | |
| 587 | | |
| 32,160 | |
| Corporate bonds | |
| 991 | | |
| - | | |
| 9 | | |
| 982 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total available-for-sale | |
$ | 97,536 | | |
$ | 1,078 | | |
$ | 2,470 | | |
$ | 96,144 | |
| | |
| | | |
| | | |
| | | |
| | |
| Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
| Mortgage-backed securities: agency issued | |
$ | 159 | | |
$ | 13 | | |
$ | - | | |
$ | 172 | |
| State and municipal securities | |
| 1,973 | | |
| 13 | | |
| - | | |
| 1,986 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total held-to-maturity | |
$ | 2,132 | | |
$ | 26 | | |
$ | - | | |
$ | 2,158 | |
Unrealized losses and fair value, aggregated
by investment category and length of time that individual securities have been in continuous unrealized loss position, as of December
31, 2014, and December 31, 2013, are summarized as follows:
| (Dollars in Thousands) | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
Less than 12 months | | |
12 months or more | | |
Total | |
| | |
| | |
Unrealized | | |
| | |
Unrealized | | |
| | |
Unrealized | |
| At December 31, 2014 | |
Fair Value | | |
Losses | | |
Fair Value | | |
Losses | | |
Fair Value | | |
Losses | |
| Available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Collateralized mortgage obligations: agency issued | |
$ | 5,836 | | |
$ | 27 | | |
$ | 17,446 | | |
$ | 391 | | |
$ | 23,282 | | |
$ | 418 | |
| Collateralized mortgage obligations: non agency | |
| 335 | | |
| 2 | | |
| 192 | | |
| 6 | | |
| 527 | | |
| 8 | |
| Mortgage-backed securities: agency issued | |
| 2,883 | | |
| 80 | | |
| 6,888 | | |
| 85 | | |
| 9,771 | | |
| 165 | |
| U.S. Government agency securities | |
| - | | |
| - | | |
| 3,615 | | |
| 32 | | |
| 3,615 | | |
| 32 | |
| State and municipal securities | |
| 5,123 | | |
| 41 | | |
| 3,054 | | |
| 39 | | |
| 8,177 | | |
| 80 | |
| Total | |
$ | 14,177 | | |
$ | 150 | | |
$ | 31,195 | | |
$ | 553 | | |
$ | 45,372 | | |
$ | 703 | |
| | |
Less than 12 months | | |
12 months or more | | |
Total | |
| | |
| | |
Unrealized | | |
| | |
Unrealized | | |
| | |
Unrealized | |
| At December 31, 2013 | |
Fair Value | | |
Losses | | |
Fair Value | | |
Losses | | |
Fair Value | | |
Losses | |
| Available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Collateralized mortgage obligations: agency issued | |
$ | 21,043 | | |
$ | 778 | | |
$ | 6,265 | | |
$ | 468 | | |
$ | 27,308 | | |
$ | 1,246 | |
| Collateralized mortgage obligations: non agency | |
| 389 | | |
| 27 | | |
| 1,619 | | |
| 216 | | |
| 2,008 | | |
| 243 | |
| Mortgage-backed securities: agency issued | |
| 7,752 | | |
| 218 | | |
| 2,643 | | |
| 85 | | |
| 10,395 | | |
| 303 | |
| U.S. Government agency securities | |
| 5,550 | | |
| 82 | | |
| - | | |
| - | | |
| 5,550 | | |
| 82 | |
| State and municipal securities | |
| 11,551 | | |
| 485 | | |
| 1,821 | | |
| 102 | | |
| 13,372 | | |
| 587 | |
| Corporate bonds | |
| 982 | | |
| 9 | | |
| - | | |
| - | | |
| 982 | | |
| 9 | |
| Total | |
$ | 47,267 | | |
$ | 1,599 | | |
$ | 12,348 | | |
$ | 871 | | |
$ | 59,615 | | |
$ | 2,470 | |
At December 31, 2014, there were 56 investment
securities in an unrealized loss position, of which 38 were in a continuous loss position for 12 months or more. The unrealized
losses on these securities were caused by changes in interest rates, widening pricing spreads and market illiquidity, leading to
a decline in the fair value subsequent to their purchase. The Company has evaluated the securities shown above and anticipates
full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market
environment. Based on management’s evaluation, and because the Company does not have the intent to sell these securities
and it is not more likely than not that it will have to sell the securities before recovery of cost basis, the Company does not
consider these investments to be other-than-temporarily impaired at December 31, 2014.
For collateralized mortgage obligations
(“CMO”) the Company estimates expected future cash flows of the underlying collateral, together with any credit enhancements.
The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted
for future expected credit losses (which considers current delinquencies, future expected default rates and collateral value by
vintage) and prepayments. The expected cash flows of the security are then discounted to arrive at a present value amount. For
the twelve months ended December 31, 2014, no CMO was determined to be other-than-temporarily-impaired. For the twelve months ended
December 31, 2013, one CMO was determined to be other-than-temporarily-impaired. This security was sold in second quarter 2014,
incurring a loss of $69,000. The Company recorded $48,000, $37,000, and $333,000 in impairments related to credit losses through
earnings for the twelve months ended December 31, 2014, 2013, and 2012, respectively.
The following table presents the cash proceeds
from the sales of securities and their associated gross realized gains and gross realized losses that are included in earnings
for the twelve months ended December 31, 2014, 2013, and 2012:
Investment securities gross gains and losses
(Dollars in Thousands)
| | |
For the Year Ended | |
| | |
December 31,
2014 | | |
December 31,
2013 | | |
December 31,
2012 | |
| Gross realized gain on sale of securities | |
$ | 315 | | |
$ | 448 | | |
$ | 332 | |
| Gross realized loss on sale of securities | |
| (227 | ) | |
| (43 | ) | |
| (29 | ) |
| Net realized gain on sale of securities | |
$ | 88 | | |
$ | 405 | | |
$ | 303 | |
| | |
| | | |
| | | |
| | |
| Proceeds from sale of securities | |
$ | 17,755 | | |
$ | 7,832 | | |
$ | 10,917 | |
The Company did not engage in originating subprime mortgage
loans, and it does not believe that it has material exposure to subprime mortgage loans or subprime mortgage backed securities.
Additionally, the Company does not own any sovereign debt of Eurozone nations or structured financial products, such as collateralized
debt obligations or structured investment vehicles, which are known by the Company to have elevated risk characteristics.
The amortized cost and estimated fair value
of investment securities at December 31, 2014, by maturity are shown below. The amortized cost and fair value of collateralized
mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity.
Expected maturities may differ from contractual maturities because borrowers may have the right to prepay underlying loans without
prepayment penalties.
At December 31, 2014
(Dollars in Thousands)
| | |
Held-to-maturity | | |
Available-for-sale | |
| | |
Amortized | | |
| | |
Amortized | | |
| |
| | |
Cost | | |
Fair Value | | |
Cost | | |
Fair Value | |
| | |
| | |
| | |
| | |
| |
| Due in one year or less | |
$ | - | | |
$ | - | | |
$ | 325 | | |
| 329 | |
| Due after one year through five years | |
| - | | |
| - | | |
| 8,636 | | |
| 8,662 | |
| Due after five years through ten years | |
| 889 | | |
| 899 | | |
| 12,903 | | |
| 13,160 | |
| Due after ten years | |
| 817 | | |
| 818 | | |
| 13,234 | | |
| 13,796 | |
| Declining Balance Securities | |
| 123 | | |
| 135 | | |
| 51,809 | | |
| 51,493 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total investment securities | |
$ | 1,829 | | |
$ | 1,852 | | |
$ | 86,907 | | |
$ | 87,440 | |
At December 31, 2014 and 2013, investment
securities with an estimated fair value of $84.1 million and $57.4 million, respectively, were pledged to secure public deposits,
certain nonpublic deposits and borrowings.
As required of all members of the Federal
Home Loan Bank (“FHLB”) system, the Company maintains an investment in the capital stock of the FHLB in an amount equal
to the greater of $500,000 or 0.5% of home mortgage loans and pass-through securities plus 5.0% of the outstanding balance of mortgage
home loans sold to FHLB under the Mortgage Purchase Program. The FHLB system, the largest government sponsored entity in the United
States, is made up of 12 regional banks, including the FHLB of Seattle. Participating banks record the value of FHLB stock equal
to its par value at $100 per share. At December 31, 2014 and 2013, the Company held approximately $2.9 million and 3.0 million,
respectively, in FHLB stock.
The Company is required to hold FHLB’s
stock in order to receive advances and views this investment as long-term. Thus, when evaluating it for impairment, the value is
determined based on the recovery of the par value through redemption by the FHLB or from the sale to another member, rather than
by recognizing temporary declines in value. The FHLB of Seattle disclosed that it reported net income for the twelve month period
ended December 31, 2014, at which time it declared a cash dividend. On November 22, 2013, the FHLB of Seattle entered into an amended
Stipulation and Consent to the Issuance of a Consent Order with the Federal Housing Finance Agency (“Finance Agency”),
modifying the previous order issued on October 25, 2010. The Finance Agency now deems the FHLB of Seattle to be “adequately
capitalized” under the Finance Agency’s Prompt Corrective Action rule. The Company has concluded that its investment
in FHLB is not impaired as of December 31, 2014, and believes that it will ultimately recover the par value of its investment in
this stock.
The Company owns $1.0 million in common
stock in Pacific Coast Bankers’ Bancshares (PCBB), from which the Company receives a variety of corresponding banking services
through its banking subsidiary Pacific Coast Bankers Bank. An investment by the Company in such an entity is permissible under
12 CFR 362.3(a)(2)(iv). When evaluating this investment for impairment, the value is determined based on the recovery of the par
value through any redemption by PCBB or from the sale to another eligible purchaser, rather than by recognizing temporary declines
in value. PCBB disclosed that it reported net income for the twelve month period ended December 31, 2014 and maintains capital
ratios that exceed “well capitalized” standards for regulatory purposes.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES AND CREDIT
QUALITY
Loans
Loans held in the portfolio at December 31, 2014 and December
31, 2013, are as follows:
| (Dollars in Thousands) |
|
December
31, 2014 |
|
|
December
31, 2013 |
|
| |
|
|
|
|
|
|
| Commercial and agricultural |
|
$ |
120,517 |
|
|
$ |
104,111 |
|
| Real estate: |
|
|
|
|
|
|
|
|
| Construction and development |
|
|
26,711 |
|
|
|
29,096 |
|
| Residential 1-4 family |
|
|
92,965 |
|
|
|
87,762 |
|
| Multi-family |
|
|
18,541 |
|
|
|
17,520 |
|
| Commercial real estate — owner occupied |
|
|
125,632 |
|
|
|
105,594 |
|
| Commercial real estate — non owner occupied |
|
|
117,137 |
|
|
|
117,294 |
|
| Farmland |
|
|
22,245 |
|
|
|
23,698 |
|
| Consumer |
|
|
40,565 |
|
|
|
20,728 |
|
| Gross loans |
|
|
564,313 |
|
|
|
505,803 |
|
| Less: deferred fees |
|
|
(1,214 |
) |
|
|
(1,137 |
) |
| |
|
|
|
|
|
|
|
|
| Portfolio Loans |
|
$ |
563,099 |
|
|
$ |
504,666 |
|
Allowance for loan losses and credit quality
The allowance for loan losses represents
the Company’s estimate as to the probable credit losses inherent in its loan portfolio. The allowance for loan losses is
increased through periodic charges to earnings through provision for loan losses and represents the aggregate amount, net of loans
charged-off and recoveries on previously charged-off loans, that is needed to establish an appropriate reserve for credit losses.
The allowance is estimated based on a variety of factors and using a methodology as described below:
| |
· |
The Company classifies loans into relatively homogeneous pools by loan type in accordance with regulatory guidelines for regulatory reporting purposes. The Company regularly reviews all loans within each loan category to establish risk ratings for them that include Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Pursuant to ASC 310 “Accounting by Creditors for Impairment of a Loan”, the impaired portion of collateral dependent loans is charged-off. Other risk-related loans not considered impaired have loss factors applied to the various loan pool balances to establish loss potential for provisioning purposes. |
| |
· |
Analyses are performed to establish the loss factors based on historical experience, as well as expected losses based on qualitative evaluations of such factors as the economic trends and conditions, industry conditions, levels and trends in delinquencies and impaired loans, levels and trends in charge-offs and recoveries, among others. The loss factors are applied to loan category pools segregated by risk classification to estimate the loss inherent in the Company’s loan portfolio pursuant to ASC 450 “Accounting for Contingencies.” |
| |
· |
Additionally, impaired loans are evaluated for loss potential on an individual basis in accordance with ASC 310 “Accounting by Creditors for Impairment of a Loan,” and specific reserves are established based on thorough analysis of collateral values where loss potential exists. When an impaired loan is collateral dependent and a deficiency exists in the fair value of collateral securing the loan in comparison to the associated loan balance, the deficiency is charged-off at that time or a specific reserve is established. Impaired loans are reviewed no less frequently than quarterly. |
| |
· |
In the event that a current appraisal to support the fair value of the real estate collateral underlying an impaired loan has not yet been received, but the Company believes that the collateral value is insufficient to support the loan amount, an impairment reserve is recorded. In these instances, the receipt of a current appraisal triggers an updated review of the collateral support for the loan and any deficiency is charged-off or reserved at that time. In those instances where a current appraisal is not available in a timely manner in relation to a financial reporting cut-off date, the Company discounts the most recent third-party appraisal depending on a number of factors including, but not limited to, property location, local price volatility, local economic conditions, and recent comparable sales. In all cases, the costs to sell the subject property are deducted in arriving at the fair value of the collateral. |
Changes in the allowance for loan losses
for the twelve months ended December, 2014 and 2013 were as follows:
Allowance for Loan Losses
| Dollars in Thousands |
|
|
|
|
Commercial Real |
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
| |
|
Commercial |
|
|
Estate ("CRE") |
|
|
Real Estate |
|
|
Consumer |
|
|
Unallocated |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the twelve months ended December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Beginning balance |
|
$ |
775 |
|
|
$ |
3,506 |
|
|
$ |
675 |
|
|
$ |
744 |
|
|
$ |
2,659 |
|
|
$ |
8,359 |
|
| Charge-offs and concessions |
|
|
(26 |
) |
|
|
(533 |
) |
|
|
(129 |
) |
|
|
(79 |
) |
|
|
- |
|
|
|
(767 |
) |
| Recoveries |
|
|
11 |
|
|
|
425 |
|
|
|
22 |
|
|
|
3 |
|
|
|
- |
|
|
|
461 |
|
| Provision / (recapture) |
|
|
262 |
|
|
|
21 |
|
|
|
133 |
|
|
|
311 |
|
|
|
(427 |
) |
|
|
300 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending balance |
|
$ |
1,022 |
|
|
$ |
3,419 |
|
|
$ |
701 |
|
|
$ |
979 |
|
|
$ |
2,232 |
|
|
$ |
8,353 |
|
Allowance for Loan Losses
| |
|
|
|
|
Commercial Real |
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
| Dollars in Thousands |
|
Commercial |
|
|
Estate ("CRE") |
|
|
Real Estate |
|
|
Consumer |
|
|
Unallocated |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the twelve months ended December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Beginning balance |
|
$ |
923 |
|
|
$ |
4,098 |
|
|
$ |
829 |
|
|
$ |
531 |
|
|
$ |
2,977 |
|
|
$ |
9,358 |
|
| Charge-offs and concessions |
|
|
(131 |
) |
|
|
(90 |
) |
|
|
(453 |
) |
|
|
(154 |
) |
|
|
- |
|
|
|
(828 |
) |
| Recoveries |
|
|
36 |
|
|
|
226 |
|
|
|
14 |
|
|
|
3 |
|
|
|
- |
|
|
|
279 |
|
| Provision / (recapture) |
|
|
(53 |
) |
|
|
(728 |
) |
|
|
285 |
|
|
|
364 |
|
|
|
(318 |
) |
|
|
(450 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending balance |
|
$ |
775 |
|
|
$ |
3,506 |
|
|
$ |
675 |
|
|
$ |
744 |
|
|
$ |
2,659 |
|
|
$ |
8,359 |
|
Recorded investment in loans as of December 31, 2014 and 2013
are as follows:
Schedule of Loan Losses Related to Financing
Receivables Current and Noncurrent
| Dollars
in Thousands | |
| | |
Commercial
Real | | |
Residential | | |
| | |
| | |
| |
| | |
Commercial | | |
Estate ("CRE") | | |
Real Estate | | |
Consumer | | |
Unallocated | | |
Total | |
| As of December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Allowance for Loan Losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ending balance: individually evaluated | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| for impairment | |
$ | - | | |
$ | 249 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 249 | |
| Ending balance: collectively evaluated | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| for impairment | |
| 1,022 | | |
| 3,170 | | |
| 701 | | |
| 979 | | |
| 2,232 | | |
| 8,104 | |
| Total allowance for loan losses | |
$ | 1,022 | | |
$ | 3,419 | | |
$ | 701 | | |
$ | 979 | | |
$ | 2,232 | | |
$ | 8,353 | |
| Loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ending balance: individually evaluated | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| for impairment | |
$ | 380 | | |
$ | 9,864 | | |
$ | 1,067 | | |
$ | - | | |
$ | - | | |
$ | 11,311 | |
| Ending balance: collectively evaluated | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| for impairment | |
$ | 120,137 | | |
$ | 281,861 | | |
$ | 110,439 | | |
$ | 40,565 | | |
$ | - | | |
$ | 553,002 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ending balance | |
$ | 120,517 | | |
$ | 291,725 | | |
$ | 111,506 | | |
$ | 40,565 | | |
$ | - | | |
$ | 564,313 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Less deferred fees | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | (1,214 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ending balance total loans | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 563,099 | |
Schedule of Loan Losses Related to Financing
Receivables Current and Noncurrent
| Dollars
in Thousands |
|
| |
Commercial
Real | | |
Residential | | |
| | |
| | |
| |
| | |
Commercial | | |
Estate ("CRE") | | |
Real Estate | | |
Consumer | | |
Unallocated | | |
Total | |
| As of December 31, 2013 |
|
| |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Allowance for Loan Losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ending balance: individually evaluated | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| for impairment | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| Ending balance: collectively evaluated | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| for impairment | |
$ | 775 | | |
$ | 3,506 | | |
$ | 675 | | |
$ | 744 | | |
$ | 2,659 | | |
$ | 8,359 | |
| Total allowance for loan losses | |
$ | 775 | | |
$ | 3,506 | | |
$ | 675 | | |
$ | 744 | | |
$ | 2,659 | | |
$ | 8,359 | |
| Loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ending balance: individually evaluated | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| for impairment | |
$ | 587 | | |
$ | 8,656 | | |
$ | 626 | | |
$ | 53 | | |
$ | - | | |
$ | 9,922 | |
| Ending balance: collectively evaluated | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| for impairment | |
$ | 103,524 | | |
$ | 267,026 | | |
$ | 104,656 | | |
$ | 20,675 | | |
$ | - | | |
$ | 495,881 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ending balance | |
$ | 104,111 | | |
$ | 275,682 | | |
$ | 105,282 | | |
$ | 20,728 | | |
$ | - | | |
$ | 505,803 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Less deferred fees | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | (1,137 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ending balance total loans | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 504,666 | |
Credit Quality Indicators
Federal regulations require that the Bank
periodically evaluate the risks inherent in its loan portfolios. In addition, the Washington Division of Banks and the Federal
Deposit Insurance Corporation (“FDIC”) have authority to identify problem loans and, if appropriate, require them to
be reclassified. There are three classifications for problem loans: Substandard, Doubtful, and Loss. These terms are used as follows:
| |
· |
“Substandard” loans have one or more defined weaknesses and are characterized by the distinct possibility some loss will be sustained if the deficiencies are not corrected. |
| |
· |
“Doubtful” loans have the weaknesses of loans classified as "Substandard," with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. There is a high possibility of loss in loans classified as "Doubtful." |
| |
· |
“Loss” loans are considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as "Loss," it must be charged-off; meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve. |
The Bank also classifies some loans as
“Pass” or Other Loans Especially Mentioned (“OLEM”). Within the Pass classification certain loans are “Watch”
rated because they have elements of risk that require more monitoring than other performing loans. Pass grade loans include a range
of loans from very high credit quality to acceptable credit quality. These borrowers generally have strong to acceptable capital
levels and consistent earnings and debt service capacity. Loans with higher grades within the Pass category may include borrowers
who are experiencing unusual operating difficulties, but have acceptable payment performance to date. Overall, loans with a Pass
grade show no immediate loss exposure. Loans classified as OLEM continue to perform but have shown deterioration in credit quality
and require close monitoring.
Credit quality indicators as of December 31, 2014
and December 31, 2013 were as follows:
(Dollars in Thousands)
December 31, 2014
| |
|
|
|
|
Other Loans |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Especially |
|
|
|
|
|
|
|
|
|
|
| |
|
Pass |
|
|
Mentioned |
|
|
Substandard |
|
|
Doubtful |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and agricultural |
|
$ |
111,800 |
|
|
$ |
6,354 |
|
|
$ |
2,363 |
|
|
$ |
- |
|
|
$ |
120,517 |
|
| Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Construction and development |
|
|
25,696 |
|
|
|
50 |
|
|
|
965 |
|
|
|
- |
|
|
|
26,711 |
|
| Residential 1-4 family |
|
|
89,183 |
|
|
|
684 |
|
|
|
3,098 |
|
|
|
- |
|
|
|
92,965 |
|
| Multi-family |
|
|
18,274 |
|
|
|
267 |
|
|
|
- |
|
|
|
- |
|
|
|
18,541 |
|
| Commercial real estate — owner occupied |
|
|
117,444 |
|
|
|
1,717 |
|
|
|
6,471 |
|
|
|
- |
|
|
|
125,632 |
|
| Commercial real estate — non owner occupied |
|
|
94,068 |
|
|
|
17,587 |
|
|
|
5,233 |
|
|
|
249 |
|
|
|
117,137 |
|
| Farmland |
|
|
20,130 |
|
|
|
1,862 |
|
|
|
253 |
|
|
|
- |
|
|
|
22,245 |
|
| Total real estate |
|
|
364,795 |
|
|
|
22,167 |
|
|
|
16,020 |
|
|
|
249 |
|
|
|
403,231 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer |
|
|
40,436 |
|
|
|
82 |
|
|
|
47 |
|
|
|
- |
|
|
|
40,565 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less deferred fees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,214 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total loans |
|
$ |
517,031 |
|
|
$ |
28,603 |
|
|
$ |
18,430 |
|
|
$ |
249 |
|
|
$ |
563,099 |
|
| December 31, 2013 | |
| | |
Other Loans | | |
| | |
| | |
| |
| | |
| | |
Especially | | |
| | |
| | |
| |
| | |
Pass | | |
Mentioned | | |
Substandard | | |
Doubtful | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| |
| Commercial and agricultural | |
$ | 100,262 | | |
$ | 2,858 | | |
$ | 991 | | |
$ | - | | |
$ | 104,111 | |
| Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Construction and development | |
| 26,587 | | |
| 1,101 | | |
| 1,408 | | |
| - | | |
| 29,096 | |
| Residential 1-4 family | |
| 84,407 | | |
| 554 | | |
| 2,801 | | |
| - | | |
| 87,762 | |
| Multi-family | |
| 17,520 | | |
| - | | |
| - | | |
| - | | |
| 17,520 | |
| Commercial real estate — owner occupied | |
| 100,612 | | |
| 1,019 | | |
| 3,963 | | |
| - | | |
| 105,594 | |
| Commercial real estate — non owner occupied | |
| 98,044 | | |
| 16,752 | | |
| 2,498 | | |
| - | | |
| 117,294 | |
| Farmland | |
| 20,228 | | |
| 2,464 | | |
| 1,006 | | |
| - | | |
| 23,698 | |
| Total real estate | |
| 347,398 | | |
| 21,890 | | |
| 11,676 | | |
| - | | |
| 380,964 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Consumer | |
| 20,570 | | |
| 62 | | |
| 96 | | |
| - | | |
| 20,728 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Less deferred fees | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,137 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total loans | |
$ | 468,230 | | |
$ | 24,810 | | |
$ | 12,763 | | |
$ | - | | |
$ | 504,666 | |
Impaired Loans
Impaired loans by type as of December 31,
2014, and interest income recognized for the twelve months ended December 31, 2014, were as follows:
| (Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Unpaid |
|
|
|
|
|
|
|
|
Average |
|
|
Interest |
|
| |
|
Principal |
|
|
Recorded |
|
|
Related |
|
|
Recorded |
|
|
Income |
|
| |
|
Balance |
|
|
Investment |
|
|
Allowance |
|
|
Investment |
|
|
Recognized |
|
| December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| With no Related Allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
|
$ |
418 |
|
|
$ |
380 |
|
|
$ |
- |
|
|
$ |
439 |
|
|
$ |
19 |
|
| Consumer |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
|
|
- |
|
| Residential real estate |
|
|
1,359 |
|
|
|
1,067 |
|
|
|
- |
|
|
|
866 |
|
|
|
58 |
|
| Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CRE — owner occupied |
|
|
1,381 |
|
|
|
1,379 |
|
|
|
- |
|
|
|
1,662 |
|
|
|
- |
|
| CRE — non owner occupied |
|
|
7,642 |
|
|
|
7,271 |
|
|
|
- |
|
|
|
4,705 |
|
|
|
45 |
|
| Farmland |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
716 |
|
|
|
225 |
|
| Construction and development |
|
|
3,023 |
|
|
|
965 |
|
|
|
- |
|
|
|
1,201 |
|
|
|
57 |
|
| Total |
|
$ |
13,823 |
|
|
$ |
11,062 |
|
|
$ |
- |
|
|
$ |
9,642 |
|
|
$ |
404 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| With a Related Allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
| Residential real estate |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| CRE — non owner occupied |
|
|
249 |
|
|
|
249 |
|
|
|
249 |
|
|
|
83 |
|
|
|
- |
|
| Total |
|
$ |
249 |
|
|
$ |
249 |
|
|
$ |
249 |
|
|
$ |
83 |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Impaired Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
|
$ |
418 |
|
|
$ |
380 |
|
|
$ |
- |
|
|
$ |
439 |
|
|
$ |
19 |
|
| Consumer |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
|
|
- |
|
| Residential real estate |
|
|
1,359 |
|
|
|
1,067 |
|
|
|
249 |
|
|
|
866 |
|
|
|
58 |
|
| Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CRE — owner occupied |
|
|
1,381 |
|
|
|
1,379 |
|
|
|
- |
|
|
|
1,662 |
|
|
|
- |
|
| CRE — non owner occupied |
|
|
7,891 |
|
|
|
7,520 |
|
|
|
- |
|
|
|
4,788 |
|
|
|
45 |
|
| Farmland |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
716 |
|
|
|
225 |
|
| Construction and development |
|
|
3,023 |
|
|
|
965 |
|
|
|
- |
|
|
|
1,201 |
|
|
|
57 |
|
| Total Impaired Loans |
|
$ |
14,072 |
|
|
$ |
11,311 |
|
|
$ |
249 |
|
|
$ |
9,725 |
|
|
$ |
404 |
|
Impaired loans by type as of December 31,
2013, and interest income recognized for the twelve months ended December 31, 2013, were as follows:
| (Dollars in Thousands) |
|
Unpaid |
|
|
|
|
|
|
|
|
Average |
|
|
Interest |
|
| |
|
Principal |
|
|
Recorded |
|
|
Related |
|
|
Recorded |
|
|
Income |
|
| |
|
Balance |
|
|
Investment |
|
|
Allowance |
|
|
Investment |
|
|
Recognized |
|
| December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| With no Related Allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
|
$ |
608 |
|
|
$ |
587 |
|
|
$ |
- |
|
|
$ |
1,270 |
|
|
$ |
9 |
|
| Consumer |
|
|
53 |
|
|
|
53 |
|
|
|
- |
|
|
|
11 |
|
|
|
1 |
|
| Residential real estate |
|
|
815 |
|
|
|
626 |
|
|
|
- |
|
|
|
1,045 |
|
|
|
25 |
|
| Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CRE — owner occupied |
|
|
1,714 |
|
|
|
1,714 |
|
|
|
- |
|
|
|
2,482 |
|
|
|
24 |
|
| CRE — non owner occupied |
|
|
6,776 |
|
|
|
4,579 |
|
|
|
- |
|
|
|
5,195 |
|
|
|
40 |
|
| Farmland |
|
|
955 |
|
|
|
955 |
|
|
|
- |
|
|
|
959 |
|
|
|
- |
|
| Construction and development |
|
|
3,685 |
|
|
|
1,408 |
|
|
|
- |
|
|
|
1,582 |
|
|
|
78 |
|
| Total |
|
$ |
14,606 |
|
|
$ |
9,922 |
|
|
$ |
- |
|
|
$ |
12,544 |
|
|
$ |
177 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| With a Related Allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2 |
|
|
$ |
- |
|
| Residential real estate |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
|
|
- |
|
| CRE — non owner occupied |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Total |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
42 |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Impaired Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
|
$ |
608 |
|
|
$ |
587 |
|
|
$ |
- |
|
|
$ |
1,270 |
|
|
$ |
9 |
|
| Consumer |
|
|
53 |
|
|
|
53 |
|
|
|
- |
|
|
|
13 |
|
|
|
1 |
|
| Residential real estate |
|
|
815 |
|
|
|
626 |
|
|
|
- |
|
|
|
1,085 |
|
|
|
25 |
|
| Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CRE — owner occupied |
|
|
1,714 |
|
|
|
1,714 |
|
|
|
- |
|
|
|
2,482 |
|
|
|
24 |
|
| CRE — non owner occupied |
|
|
6,776 |
|
|
|
4,579 |
|
|
|
- |
|
|
|
5,195 |
|
|
|
40 |
|
| Farmland |
|
|
955 |
|
|
|
955 |
|
|
|
- |
|
|
|
959 |
|
|
|
- |
|
| Construction and development |
|
|
3,685 |
|
|
|
1,408 |
|
|
|
- |
|
|
|
1,582 |
|
|
|
78 |
|
| Total Impaired Loans |
|
$ |
14,606 |
|
|
$ |
9,922 |
|
|
$ |
- |
|
|
$ |
12,586 |
|
|
$ |
177 |
|
Insider Loans
Certain related parties of the Company,
principally directors and their affiliates, were loan customers of the Bank in the ordinary course of business during 2014 and
2013. Total related party loans outstanding at December 31, 2014 and 2013 to executive officers and directors were $2,374 and $66,
respectively. During 2014 and 2013, new loans of $3,758 and $5, respectively, were made, and repayments totaled $1,450 and $324,
respectively. In management’s opinion, these loans and transactions were on the same terms as those for comparable loans
and transactions with non-related parties. No loans to related parties were on non-accrual, past due or restructured at December
31, 2014.
Aging Analysis
The following tables summarize the Company’s
loans past due, both accruing and nonaccruing, by type as of December 31, 2014 and December 31, 2013:
| (Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Greater |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
30-59 Days |
|
|
60-89 Days |
|
|
Than |
|
|
Total Past |
|
|
Non-accrual |
|
|
|
|
|
Total |
|
| |
|
Past Due |
|
|
Past Due |
|
|
90 Days |
|
|
Due |
|
|
Loans |
|
|
Current |
|
|
Loans |
|
| December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and agricultural |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
96 |
|
|
$ |
120,421 |
|
|
$ |
120,517 |
|
| Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Construction and development |
|
|
18 |
|
|
|
- |
|
|
|
- |
|
|
|
18 |
|
|
|
965 |
|
|
|
25,728 |
|
|
|
26,711 |
|
| Residential 1-4 family |
|
|
537 |
|
|
|
68 |
|
|
|
- |
|
|
|
605 |
|
|
|
848 |
|
|
|
91,512 |
|
|
|
92,965 |
|
| Multi-family |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18,541 |
|
|
|
18,541 |
|
| Commercial real estate — owner occupied |
|
|
- |
|
|
|
- |
|
|
|
409 |
|
|
|
409 |
|
|
|
1,325 |
|
|
|
123,898 |
|
|
|
125,632 |
|
| Commercial real estate — non owner occupied |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,482 |
|
|
|
111,655 |
|
|
|
117,137 |
|
| Farmland |
|
|
46 |
|
|
|
- |
|
|
|
- |
|
|
|
46 |
|
|
|
- |
|
|
|
22,199 |
|
|
|
22,245 |
|
| Total real estate |
|
|
601 |
|
|
|
68 |
|
|
|
409 |
|
|
|
1,078 |
|
|
|
8,620 |
|
|
|
393,533 |
|
|
|
403,231 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer |
|
|
170 |
|
|
|
2 |
|
|
|
- |
|
|
|
172 |
|
|
|
- |
|
|
|
40,393 |
|
|
|
40,565 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less deferred fees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,214 |
) |
|
|
(1,214 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
771 |
|
|
$ |
70 |
|
|
$ |
409 |
|
|
$ |
1,250 |
|
|
$ |
8,716 |
|
|
$ |
553,133 |
|
|
$ |
563,099 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and agricultural |
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
14 |
|
|
$ |
286 |
|
|
$ |
103,811 |
|
|
$ |
104,111 |
|
| Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Construction and development |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,408 |
|
|
|
27,688 |
|
|
|
29,096 |
|
| Residential 1-4 family |
|
|
333 |
|
|
|
- |
|
|
|
- |
|
|
|
333 |
|
|
|
400 |
|
|
|
87,029 |
|
|
|
87,762 |
|
| Multi-family |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17,520 |
|
|
|
17,520 |
|
| Commercial real estate — owner occupied |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,659 |
|
|
|
103,935 |
|
|
|
105,594 |
|
| Commercial real estate — non owner occupied |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,482 |
|
|
|
114,812 |
|
|
|
117,294 |
|
| Farmland |
|
|
875 |
|
|
|
- |
|
|
|
- |
|
|
|
875 |
|
|
|
955 |
|
|
|
21,868 |
|
|
|
23,698 |
|
| Total real estate |
|
|
1,208 |
|
|
|
- |
|
|
|
- |
|
|
|
1,208 |
|
|
|
6,904 |
|
|
|
372,852 |
|
|
|
380,964 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer |
|
|
165 |
|
|
|
3 |
|
|
|
- |
|
|
|
168 |
|
|
|
53 |
|
|
|
20,507 |
|
|
|
20,728 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less deferred fees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,137 |
) |
|
|
(1,137 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
1,387 |
|
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
1,390 |
|
|
$ |
7,243 |
|
|
$ |
496,033 |
|
|
$ |
504,666 |
|
Interest income on non-accrual loans that
would have been recorded had those loans performed in accordance with their initial terms was $679, $1,130, and $1,213 for 2014,
2013, and 2012, respectively.
Modifications
A modification of a loan constitutes a
troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes
a concession. There are various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted
by the Company. Commercial and industrial loans modified in a TDR may involve term extensions, below market interest rates
and/or interest-only payments wherein the delay in the repayment of principal is determined to be significant when all elements
of the loan and circumstances are considered. Additional collateral, a co-borrower, or a guarantor is often required. Commercial
mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan,
extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting
or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only
payment period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are
lowered to accommodate the borrowers’ financial needs. Land loans are typically structured as interest-only monthly payments
with a balloon payment due at maturity. Land loans modified in a TDR typically involve extending the balloon payment by one
to three years, and providing an interest rate concession. Home equity modifications are made infrequently and are uniquely designed
to meet the specific needs of each borrower.
Loans modified in a TDR are considered
impaired loans and typically already on non-accrual status. Partial charge-offs have in some cases already been taken against the
outstanding loan balance. Loans modified in a TDR for the Company may have the financial effect of increasing the specific
allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR is measured based on
the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable
market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.
The Company’s practice is to re-appraise collateral dependent loans every six to nine months. During the twelve months ended
December 31, 2014, there was no impact on the allowance from TDRs during the period, as the loans classified as TDRs during the
period did not have a specific reserve and were already considered impaired loans at the time of modification and no further impairment
was required upon modification. The Company had no commitments to lend additional funds for loans classified as TDRs at December
31, 2014.
The Company closely monitors the performance
of modified loans for delinquency, as delinquency is considered an early indicator of possible future default. The allowance may
be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down
the carrying value of the loan.
The following table presents TDRs as of
December 31, 2014 and 2013, all of which were modified due to financial stress of the borrower. There were not any subsequent defaulted
TDRs as of December 31, 2014 and 2013. There were no loans modified or recorded as TDRs during the years ended December 31, 2014
and 2013.
| Restructured loans by type current and subsequently defaulted | |
| |
| (Dollars in Thousands) | |
| | |
| | |
| |
| | |
December 31, 2014 | |
| | |
Current Restructured Loans | |
| | |
Number of Loans | | |
Pre-TDR
Outstanding
Recorded
Investment | | |
Post-TDR
Outstanding
Recorded
Investment | |
| Commercial and agriculture | |
| 1 | | |
$ | 335 | | |
$ | 284 | |
| Construction and development | |
| 2 | | |
| 2,764 | | |
| 965 | |
| Residential real estate | |
| 2 | | |
| 272 | | |
| 219 | |
| CRE — owner occupied | |
| 1 | | |
| 59 | | |
| 54 | |
| CRE — non owner occupied | |
| 1 | | |
| 2,180 | | |
| 2,038 | |
| Total restructured loans (1) | |
| 7 | | |
$ | 5,610 | | |
$ | 3,560 | |
| | |
December 31, 2013 | |
| | |
Current Restructured Loans | |
| | |
Number of Loans | | |
Pre-TDR
Outstanding
Recorded
Investment | | |
Post-TDR
Outstanding
Recorded
Investment | |
| Commercial and agriculture | |
| 1 | | |
$ | 335 | | |
$ | 302 | |
| Construction and development | |
| 3 | | |
| 2,972 | | |
| 1,408 | |
| Residential real estate | |
| 2 | | |
| 272 | | |
| 227 | |
| CRE — owner occupied | |
| 1 | | |
| 59 | | |
| 55 | |
| CRE — non owner occupied | |
| 1 | | |
| 2,180 | | |
| 2,096 | |
| Total restructured loans (1) | |
| 8 | | |
$ | 5,818 | | |
$ | 4,088 | |
(1) The period end balances are inclusive of all
partial paydowns and charge-offs since the modification date.
The following table summarizes the Company’s
troubled debt restructured loans by type and geographic region as of December 31, 2014:
| Restructured loans by type and geographic region |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2014 |
|
| |
|
Restructured Loans |
|
| |
|
Central Western
Washington |
|
|
Southwestern
Washington |
|
|
Northern
Washington |
|
|
Oregon |
|
|
Totals |
|
|
Number of
Loans |
|
| Commercial and agriculture |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
284 |
|
|
$ |
- |
|
|
$ |
284 |
|
|
|
1 |
|
| Construction and development |
|
|
- |
|
|
|
- |
|
|
|
841 |
|
|
|
124 |
|
|
|
965 |
|
|
|
2 |
|
| Residential real estate |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
219 |
|
|
|
219 |
|
|
|
2 |
|
| CRE — owner occupied |
|
|
54 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
54 |
|
|
|
1 |
|
| CRE — non owner occupied |
|
|
- |
|
|
|
- |
|
|
|
2,038 |
|
|
|
- |
|
|
|
2,038 |
|
|
|
1 |
|
| Total restructured loans |
|
$ |
54 |
|
|
$ |
- |
|
|
$ |
3,163 |
|
|
$ |
343 |
|
|
$ |
3,560 |
|
|
|
7 |
|
The following table presents troubled debt restructurings by
accrual or nonaccrual status as of December 31, 2014 and 2013:
| Restructured loans by accrual or nonaccrual status |
|
|
|
|
|
|
| (Dollars in Thousands) |
|
|
|
|
|
|
| |
|
December 31, 2014 |
|
| |
|
Restructured loans |
|
| |
|
Accrual Status |
|
|
Non-accrual
Status |
|
|
Total
Modifications |
|
| Commercial and agriculture |
|
$ |
284 |
|
|
$ |
- |
|
|
$ |
284 |
|
| Construction and development |
|
|
- |
|
|
|
965 |
|
|
|
965 |
|
| Residential real estate |
|
|
219 |
|
|
|
- |
|
|
|
219 |
|
| CRE — owner occupied |
|
|
54 |
|
|
|
- |
|
|
|
54 |
|
| CRE — non owner occupied |
|
|
2,038 |
|
|
|
- |
|
|
|
2,038 |
|
| Total restructured loans |
|
$ |
2,595 |
|
|
$ |
965 |
|
|
$ |
3,560 |
|
| |
|
December 31, 2013 |
|
| |
|
Restructured loans |
|
| |
|
Accrual Status |
|
|
Non-accrual
Status |
|
|
Total
Modifications |
|
| Commercial and agriculture |
|
$ |
302 |
|
|
$ |
- |
|
|
$ |
302 |
|
| Construction and development |
|
|
- |
|
|
|
1,408 |
|
|
|
1,408 |
|
| Residential real estate |
|
|
227 |
|
|
|
- |
|
|
|
227 |
|
| CRE — owner occupied |
|
|
55 |
|
|
|
- |
|
|
|
55 |
|
| CRE — non owner occupied |
|
|
2,096 |
|
|
|
- |
|
|
|
2,096 |
|
| Total restructured loans |
|
$ |
2,680 |
|
|
$ |
1,408 |
|
|
$ |
4,088 |
|
NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE
INCOME/(LOSS)
The following table presents the changes
in each component of accumulated other comprehensive income/(loss), net of tax, for the twelve months ended December 31, 2014 and
2013:
| (Dollars in Thousands) |
|
Net Unrealized |
|
|
|
|
|
|
|
| |
|
Gains and Losses |
|
|
|
|
|
|
|
| |
|
On Investment |
|
|
Defined Benefit |
|
|
|
|
| |
|
Securities |
|
|
Plans |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
| Balance, January 1, 2014 |
|
$ |
(919 |
) |
|
$ |
(450 |
) |
|
$ |
(1,369 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive gain (loss) before reclassifications |
|
|
1,295 |
|
|
|
(35 |
) |
|
|
1,260 |
|
| Amounts reclassified from AOCI |
|
|
(26 |
) |
|
|
- |
|
|
|
(26 |
) |
| Net Current period other comprehensive income (loss) |
|
|
1,269 |
|
|
|
(35 |
) |
|
|
1,234 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2014 |
|
$ |
350 |
|
|
$ |
(485 |
) |
|
$ |
(135 |
) |
| |
|
Net Unrealized |
|
|
|
|
|
|
|
| |
|
Gains and Losses |
|
|
|
|
|
|
|
| |
|
On Investment |
|
|
Defined Benefit |
|
|
|
|
| |
|
Securities |
|
|
Plans |
|
|
Total |
|
| Balance, January 1, 2013 |
|
$ |
956 |
|
|
$ |
(535 |
) |
|
$ |
421 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive gain (loss) before reclassifications |
|
|
(1,632 |
) |
|
|
85 |
|
|
|
(1,547 |
) |
| Amounts reclassified from AOCI |
|
|
(243 |
) |
|
|
- |
|
|
|
(243 |
) |
| Net Current period other comprehensive income (loss) |
|
|
(1,875 |
) |
|
|
85 |
|
|
|
(1,790 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2013 |
|
$ |
(919 |
) |
|
$ |
(450 |
) |
|
$ |
(1,369 |
) |
The following table presents the amounts
reclassified out of each component of accumulated other comprehensive income (“AOCI”) for the twelve months ended December
31, 2014 and 2013:
| (Dollars in Thousands) |
|
|
|
|
|
| |
|
|
|
|
|
Details about Accumulated Other
Comprehensive Income Components |
|
|
|
|
Affected Line Item in the Statement Where Net
Income is Presented |
| |
|
|
|
|
|
| |
|
For the Year |
|
|
|
| |
|
Ended December |
|
|
|
| |
|
31, 2014 |
|
|
|
| |
|
|
|
|
|
|
| Net Unrealized Gains and Losses |
|
$ |
(88 |
) |
|
(Gain) on sales of investments available for sale |
| on Investment Securities |
|
|
48 |
|
|
Net OTTI losses |
| |
|
|
14 |
|
|
Income tax expense |
| |
|
$ |
(26 |
) |
|
Unrealized gain on investment securities net of tax |
| (Dollars in Thousands) |
|
|
|
|
|
| |
|
|
|
|
|
Details about Accumulated Other
Comprehensive Income Components |
|
|
|
|
Affected Line Item in the Statement Where Net
Income is Presented |
| |
|
|
|
|
|
| |
|
For the Year |
|
|
|
| |
|
Ended December |
|
|
|
| |
|
31, 2013 |
|
|
|
| |
|
|
|
|
|
|
| Net Unrealized Gains and Losses |
|
$ |
(405 |
) |
|
(Gain) on sales of investments available for sale |
| on Investment Securities |
|
|
37 |
|
|
Net OTTI losses |
| |
|
|
125 |
|
|
Income tax expense |
| |
|
$ |
(243 |
) |
|
Unrealized gain on investment securities net of tax |
The following table presents the components of other comprehensive
income (loss) for the twelve months ended December 31, 2014 and 2013:
| (Dollars in Thousands) | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| | |
Before Tax | | |
Tax Effect | | |
Net of Tax | |
| | |
| | |
| | |
| |
| Twelve months ended December 31, 2014 | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| Net unrealized losses on investment securities: | |
| | | |
| | | |
| | |
| Net unrealized gains arising during the period | |
$ | 1,962 | | |
$ | 667 | | |
$ | 1,295 | |
| Less: reclassification adjustments for net gains realized in net income | |
| (40 | ) | |
$ | (14 | ) | |
| (26 | ) |
| Net unrealized losses on investment securities | |
$ | 1,922 | | |
$ | 653 | | |
$ | 1,269 | |
| | |
| | | |
| | | |
| | |
| Defined benefit plans: | |
| | | |
| | | |
| | |
| Amortization of unrecognized prior service costs and net actuarial gains/losses | |
$ | (53 | ) | |
$ | (18 | ) | |
$ | (35 | ) |
| | |
| | | |
| | | |
| | |
| Other Comprehensive Income | |
$ | 1,869 | | |
$ | 635 | | |
$ | 1,234 | |
| (Dollars in Thousands) | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| | |
Before Tax | | |
Tax Effect | | |
Net of Tax | |
| | |
| | |
| | |
| |
| Twelve months ended December 31, 2013 | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| Net unrealized losses on investment securities: | |
| | | |
| | | |
| | |
| Net unrealized losses arising during the period | |
$ | (2,473 | ) | |
$ | (841 | ) | |
$ | (1,632 | ) |
| Less: reclassification adjustments for net gains realized in net income | |
| (368 | ) | |
$ | (125 | ) | |
| (243 | ) |
| Net unrealized losses on investment securities | |
$ | (2,841 | ) | |
$ | (966 | ) | |
$ | (1,875 | ) |
| | |
| | | |
| | | |
| | |
| Defined benefit plans: | |
| | | |
| | | |
| | |
| Amortization of unrecognized prior service costs and net actuarial gains/losses | |
$ | 129 | | |
$ | 44 | | |
$ | 85 | |
| | |
| | | |
| | | |
| | |
| Other Comprehensive Loss | |
$ | (2,712 | ) | |
$ | (922 | ) | |
$ | (1,790 | ) |
NOTE 6 – PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are
as follows:
| Premises and equipment | |
2014 | | |
2013 | |
| Land and premises | |
$ | 19,875 | | |
$ | 19,859 | |
| Equipment, furniture and fixtures | |
| 7,698 | | |
| 8,142 | |
| Construction in progress | |
| 84 | | |
| 167 | |
| | |
| 27,657 | | |
| 28,168 | |
| Less accumulated deprecation and amortization | |
| (11,354 | ) | |
| (11,378 | ) |
| | |
| | | |
| | |
| Total premises and equipment | |
$ | 16,303 | | |
$ | 16,790 | |
| | |
| | | |
| | |
| | |
2014 | | |
2013 | | |
2012 | |
| | |
| | |
| | |
| |
| Depreciation expense | |
$ | 1,242 | | |
$ | 1,013 | | |
$ | 989 | |
| | |
| | | |
| | | |
| | |
| Rental expense | |
$ | 574 | | |
$ | 544 | | |
$ | 442 | |
| | |
| | | |
| | | |
| | |
Minimum net rental commitments under non-cancelable
operating leases having an original or remaining term of more than one year for future years ending December 31 are as follows:
| 2015 | |
$ | 491 | |
| 2016 | |
| 331 | |
| 2017 | |
| 236 | |
| 2018 | |
| 233 | |
| 2019 | |
| 229 | |
| | |
$ | 1,520 | |
Certain leases contain renewal options
from five to ten years and escalation clauses based on increases in property taxes and other costs.
NOTE 7 – OTHER REAL ESTATE OWNED
The following table presents the activity
related to OREO for the years ended December 31:
| For the Twelve Months Ended | |
December
31, 2014 | | |
December
31, 2013 | | |
$ Change | |
| Other real estate owned, beginning of period | |
$ | 2,771 | | |
$ | 4,679 | | |
$ | (1,908 | ) |
| Transfers from outstanding loans | |
| 842 | | |
| 1,756 | | |
| (914 | ) |
| Proceeds from sales | |
| (2,340 | ) | |
| (2,758 | ) | |
| 418 | |
| Net gain (loss) on sales | |
| (207 | ) | |
| 40 | | |
| (247 | ) |
| Impairment charges | |
| (67 | ) | |
| (946 | ) | |
| 879 | |
| Total other real estate owned | |
$ | 999 | | |
$ | 2,771 | | |
$ | (1,772 | ) |
At December 31, 2014 and 2013, OREO consisted
of properties as follows:
| Other real estate owned and foreclosed assets by type | |
| | |
| |
| (Unaudited) | |
| | |
| | |
| |
| (Dollars in Thousands) | |
| | |
| | |
| |
| | |
December
31, 2014 | | |
# of
Properties | | |
December
31, 2013 | | |
# of
Properties | |
| | |
| | |
| | |
| | |
| |
| Construction, Land Dev & Other Land | |
$ | 35 | | |
| 1 | | |
| 237 | | |
| 5 | |
| 1-4 Family Residential Properties | |
| - | | |
| - | | |
| 672 | | |
| 4 | |
| Nonfarm Nonresidential Properties | |
| 964 | | |
| 3 | | |
| 1,862 | | |
| 8 | |
| Total OREO by type | |
$ | 999 | | |
| 4 | | |
| 2,771 | | |
| 17 | |
Net (loss) gain on sales of OREO totaled
$(207), $40 and $331 for the years ended December 31, 2014, 2013 and 2012, respectively.
NOTE 8 – DEPOSITS
The composition of deposits at December
31 is as follows:
| Deposits | |
| | |
| |
| (Dollars in Thousands) | |
December 31,
2014 | | |
December 31,
2013 | |
| | |
| | |
| |
| NOW and money market accounts | |
$ | 274,614 | | |
$ | 262,848 | |
| Savings deposits | |
| 79,997 | | |
| 73,412 | |
| Time certificates, $100,000 or more | |
| 75,648 | | |
| 76,628 | |
| Other time certificates | |
| 43,035 | | |
| 49,431 | |
| Total interest-bearing deposits | |
| 473,294 | | |
| 462,319 | |
| Non-interest bearing demand | |
| 165,760 | | |
| 145,028 | |
| Total deposits | |
$ | 639,054 | | |
$ | 607,347 | |
Scheduled maturities of time certificates
of deposit are as follows for future years ending December 31:
| At December 31, 2014 |
|
|
|
| (Dollars in Thousands) |
|
|
|
| |
|
|
|
| |
|
Maturities |
|
| |
|
|
|
| 2015 |
|
$ |
67,642 |
|
| 2016 |
|
|
25,656 |
|
| 2017 |
|
|
14,342 |
|
| 2018 |
|
|
5,724 |
|
| 2019 |
|
|
5,160 |
|
| Thereafter |
|
|
159 |
|
| |
|
|
|
|
| Total |
|
$ |
118,683 |
|
NOTE 9 – BORROWINGS
Long-term borrowings at December 31, 2014
and 2013 represent advances from the Federal Home Loan Bank of Seattle (“FHLB”). Advances at December 31, 2014 bear
interest at 0.47% to 2.54% and mature in various years as follows: 2016 - $5,000, 2019 - $5,000 and $1,453 in 2024. The Bank has
pledged $140,773 in loans as collateral for these borrowings at December 31, 2014.
Short-term borrowings represent FHLB term
borrowings with scheduled maturity dates within one year. Short-term borrowings may also include federal funds purchased that generally
mature within one to four days from the transaction date; however there were no federal funds purchased at December 31, 2014, and
2013. The following is a summary of short-term borrowings for the years ended:
| (Dollars in Thousands) |
| |
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| Amount outstanding at end of period |
|
$ |
- |
|
|
$ |
- |
|
| Weighted average interest rate thereon |
|
|
0.28 |
% |
|
|
- |
|
| Maximum month-end balance during year |
|
$ |
- |
|
|
$ |
3,000 |
|
| Average balance during the year |
|
$ |
153 |
|
|
$ |
303 |
|
| Average interest rate during the year |
|
|
0.28 |
% |
|
|
2.94 |
% |
NOTE 10 – JUNIOR SUBORDINATED DEBENTURES
At December 31, 2014, two wholly-owned
subsidiary grantor trusts established by the Company had outstanding $13.0 million of Trust Preferred Securities (“trust
preferred securities”). Trust preferred securities accrue and pay distributions periodically at specified annual rates as
provided in the indentures. The trusts used the net proceeds from the offering of trust preferred securities to purchase a like
amount of Junior Subordinated Debentures (the “Debentures”) of the Company. The Debentures are the sole assets of the
trusts. The Company’s obligations under the Debentures and the related documents, taken together, constitute a full and unconditional
guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity
of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures
in whole or in part, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date.
The Debentures issued by the Company to
the grantor trusts totaling $13.0 million are reflected in the consolidated balance sheet in the liabilities section under the
caption “junior subordinated debentures.” The Company records interest expense on the corresponding junior subordinated
debentures in the consolidated statements of income. The Company recorded $403,000 in the consolidated balance sheet at December
31, 2014 and 2013, respectively, for the common capital securities issued by the issuer trusts.
As of December 31, 2014 and 2013, regular
accrued interest on junior subordinated debentures totaled $40,000 for both years and is included in accrued interest payable on
the balance sheet. Following are the terms of the junior subordinated debentures as of December 31, 2014.
| (Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Issued |
|
|
|
|
Maturity |
| Trust Name |
|
Issue Date |
|
Amount |
|
|
Rate |
|
Date |
| |
|
|
|
|
|
|
|
|
|
| Pacific Financial Corporation |
|
December |
|
|
|
|
|
|
|
March |
| Statutory Trust I |
|
2005 |
|
$ |
5,000 |
|
|
LIBOR + 1.45% (1) |
|
2036 |
| |
|
|
|
|
|
|
|
|
|
|
| Pacific Financial Corporation |
|
June |
|
|
|
|
|
|
|
July |
| Statutory Trust II |
|
2006 |
|
|
8,000 |
|
|
LIBOR + 1.60% (2) |
|
2036 |
| |
|
|
|
$ |
13,000 |
|
|
|
|
|
| (1) | Pacific Financial Corporation Statutory Trust I securities
incurred interest at the fixed rate of 6.39% until mid March 2011, at which the rate changed to a variable rate of 3-month LIBOR
(0.24% at December 15, 2014) plus 1.45% or 1.69%, adjusted quarterly, through the final maturity date in March 2036. |
| (2) | Pacific Financial Corporation Statutory Trust II securities
incur interest at a variable rate of 3-month LIBOR (0.253% at January 1, 2015) plus 1.60% or 1.85%, adjusted quarterly, through
the final maturity date in July 2036. |
NOTE 11 – INCOME TAXES
The Company recorded an income tax provision
for the twelve months ended December 31, 2014, 2013, and 2012. The amount of the provision for each period was commensurate with
the estimated tax liability associated with the net income earned during the period. As of December 31, 2014, the Company maintained
a deferred tax asset balance of $3.2 million. The Company believes it will be fully utilized in the normal course of business,
thus no valuation allowance is maintained against this asset.
The Company's provision for income taxes
includes both federal and state income taxes and reflects the application of federal and state statutory rates to the Company's
income before taxes. The principal difference between statutory tax rates and the Company's effective tax rate is the benefit derived
from investing in tax-exempt securities and bank owned life insurance.
Income taxes are accounted for using the
asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which
will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities
are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying
amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred
tax asset will not be realized.
The Company applies the provisions of FASB
ASC 740, Income Taxes, relating to the accounting for uncertainty in income taxes. The Company periodically reviews its income
tax positions based on tax laws and regulations, and financial reporting considerations, and records adjustments as appropriate.
This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns,
recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment. The Company’s
uncertain tax positions were nominal in amount as of December 31, 2014.
Income taxes for the years ended December 31 is as follows:
| | |
2014 | | |
2013 | | |
2012 | |
| | |
| | |
| | |
| |
| Current | |
$ | 1,003 | | |
$ | 586 | | |
$ | 1,237 | |
| Deferred | |
| 727 | | |
| 386 | | |
| 63 | |
| | |
| | | |
| | | |
| | |
| Total income tax benefit | |
$ | 1,730 | | |
$ | 972 | | |
$ | 1,300 | |
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities and net deferred tax assets are recorded in other assets in the consolidated financial
statements at December 31 are:
| | |
2014 | | |
2013 | |
| Deferred Tax Assets | |
| | | |
| | |
| Allowance for loan losses | |
$ | 2,863 | | |
$ | 2,892 | |
| Deferred compensation | |
| 102 | | |
| 111 | |
| Supplemental executive retirement plan | |
| 1,151 | | |
| 1,039 | |
| Unrealized loss on securities available for sale | |
| - | | |
| 473 | |
| Loan fees/costs | |
| 416 | | |
| 393 | |
| OREO write-downs | |
| 11 | | |
| 305 | |
| OREO operating expenses | |
| - | | |
| 174 | |
| Tax credit carry-forwards | |
| - | | |
| 534 | |
| Non-accrual loan interest | |
| 73 | | |
| 108 | |
| Other | |
| 445 | | |
| 170 | |
| | |
| | | |
| | |
| Total deferred tax assets | |
$ | 5,061 | | |
$ | 6,199 | |
| | |
| | | |
| | |
| Deferred Tax Liabilities | |
| | | |
| | |
| Depreciation | |
$ | 100 | | |
$ | 172 | |
| Loan fees/costs | |
| 1,290 | | |
| 1,185 | |
| Unrealized gain on securities available for sale | |
| 181 | | |
| - | |
| Prepaid expenses | |
| 128 | | |
| 108 | |
| FHLB dividends | |
| 130 | | |
| 137 | |
| Other | |
| 67 | | |
| 51 | |
| | |
| | | |
| | |
| Total deferred tax liabilities | |
| 1,896 | | |
| 1,653 | |
| | |
| | | |
| | |
| Net deferred tax assets | |
$ | 3,165 | | |
$ | 4,546 | |
The following is a reconciliation between the statutory and
effective federal income tax rate for the years ended December 31:
| |
|
2014 |
|
|
of Pre-tax |
|
|
2013 |
|
|
of Pre-tax |
|
|
2012 |
|
|
of Pre-tax |
|
| |
|
Amount |
|
|
Income |
|
|
Amount |
|
|
Income |
|
|
Amount |
|
|
Income |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax at statutory rate |
|
$ |
2,330 |
|
|
|
35.0 |
% |
|
$ |
1,646 |
|
|
|
35.0 |
% |
|
$ |
2,130 |
|
|
|
35.0 |
% |
| Adjustments resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Tax-exempt income |
|
|
(412 |
) |
|
|
-6.2 |
% |
|
|
(483 |
) |
|
|
-10.3 |
% |
|
|
(542 |
) |
|
|
-8.9 |
% |
| Net earnings on life insurance policies |
|
|
(169 |
) |
|
|
-2.5 |
% |
|
|
(152 |
) |
|
|
-3.2 |
% |
|
|
(178 |
) |
|
|
-2.9 |
% |
| Low income housing tax credit |
|
|
(82 |
) |
|
|
-1.2 |
% |
|
|
(101 |
) |
|
|
-2.1 |
% |
|
|
(109 |
) |
|
|
-1.8 |
% |
| Other |
|
|
63 |
|
|
|
1.0 |
% |
|
|
62 |
|
|
|
1.3 |
% |
|
|
(1 |
) |
|
|
0.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total income tax expense |
|
$ |
1,730 |
|
|
|
25.9 |
% |
|
$ |
972 |
|
|
|
20.7 |
% |
|
$ |
1,300 |
|
|
|
21.4 |
% |
As of December 31, 2014, the Company believes that it is more
likely than not that it will be able to fully realize its deferred tax asset (“DTA”) and therefore has not recorded
a valuation allowance.
NOTE 12 – EMPLOYEE BENEFITS
Incentive Compensation Plan —
The Bank has a plan that provides incentive compensation to key employees if the Bank meets certain performance criteria established
by the Board of Directors. The cost of this plan was $609, $272, and $400 in 2014, 2013 and 2012, respectively.
401(k) Plans — The Bank has
established a 401(k) profit sharing plan for those employees who meet the eligibility requirements set forth in the plan. Eligible
employees may contribute up to 15% of their compensation. Matching contributions by the Bank are at the discretion of the Board
of Directors. Contributions totaled $180, $161 and $152 for 2014, 2013 and 2012, respectively.
Director and Employee Deferred Compensation
Plans — The Company has director and employee deferred compensation plans. Under the terms of the plans, a director or
employee may participate upon approval by the Board. The participant may then elect to defer a portion of his or her earnings (directors’
fees or salary) as designated at the beginning of each plan year. Payments begin upon retirement, termination, death or permanent
disability, sale of the Company, the ten-year anniversary of the participant’s participation date, or at the discretion of
the Company. There are currently no participants in the director or employee deferred compensation plan. There were no deferrals
or ongoing expense to the Company for these plans in 2014, 2013 and 2012.
The directors of a bank acquired by the
Company in 1999 adopted two deferred compensation plans for directors - one plan providing retirement income benefits for all directors
and the other, a deferred compensation plan, covering only those directors who have chosen to participate in the plan. At the time
of adopting these plans, the Bank purchased life insurance policies on directors participating in both plans which may be used
to fund payments to them under these plans. Cash surrender values on these policies were $4,020 and $3,911 at December 31, 2014
and 2013, respectively. In 2014, 2013 and 2012, the net benefit recorded from these plans, including the cost of the related life
insurance, was $380, $354 and $396, respectively. Both of these plans were fully funded and frozen as of September 30, 2001. Plan
participants were given the option to either remain in the plan until reaching the age of 70 or to receive a lump-sum distribution.
Participants electing to remain in the plan will receive annual payments over a ten-year period upon reaching 70 years of age.
The liability associated with these plans totaled $311 and $322 at December 31, 2014 and 2013, respectively.
Executive Long-Term Compensation Agreements
— The Company has executive long-term compensation agreements to selected employees that provide incentive for those
covered employees to remain employed with the Company for a defined period of time. The cost of these agreements was $137, $107
and $95 in 2014, 2013 and 2012, respectively.
Supplemental Executive Retirement Plan
— Effective January 1, 2007, the Company adopted a non-qualified Supplemental Executive Retirement Plan (SERP) that provides
retirement benefits to its executive officers. The SERP is unsecured and unfunded and there are no plan assets. The post-retirement
benefit provided by the SERP is designed to supplement a participating officer’s retirement benefits from social security,
in order to provide the officer with a certain percentage of final average income at retirement age. The benefit is generally based
on average earnings, years of service and age at retirement. At the inception of the SERP, the Company recorded a prior service
cost to accumulate other comprehensive income of $704. The Company has purchased bank owned life insurance covering all participants
in the SERP. The cash surrender value of these policies totaled $5,945 and $5,817 at December 31, 2014 and 2013, respectively.
The following table sets forth the net
periodic pension cost and obligation assumptions used in the measurement of the benefit obligation for the years ended December
31:
| (Dollars in Thousands) | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| | |
2014 | | |
2013 | | |
2012 | |
| Net periodic pension cost: | |
| | | |
| | | |
| | |
| Service cost | |
$ | 153 | | |
$ | 145 | | |
$ | 167 | |
| Interest cost | |
| 111 | | |
| 104 | | |
| 106 | |
| Amortization of prior service cost | |
| 90 | | |
| 90 | | |
| 90 | |
| Amortization of net (gain)/loss | |
| 26 | | |
| 22 | | |
| 27 | |
| | |
| | | |
| | | |
| | |
| Net periodic pension cost | |
$ | 380 | | |
$ | 361 | | |
$ | 390 | |
| | |
| | | |
| | | |
| | |
| Weighted average assumptions: | |
| | | |
| | | |
| | |
| Discount rate | |
| 3.57 | % | |
| 4.37 | % | |
| 4.47 | % |
| Rate of compensation increase | |
| n/a | | |
| n/a | | |
| n/a | |
The following table sets forth the change in benefit obligation
at December 31:
| (Dollars in Thousands) | |
| | |
| |
| | |
2014 | | |
2013 | |
| Change in benefit obligation: | |
| | | |
| | |
| Benefit obligation at the beginning of year | |
$ | 2,573 | | |
$ | 2,342 | |
| Service cost | |
| 153 | | |
| 145 | |
| Interest cost | |
| 111 | | |
| 104 | |
| Benefits paid | |
| (45 | ) | |
| (45 | ) |
| Actuarial gain/(loss) | |
| 152 | | |
| 27 | |
| | |
| | | |
| | |
| Benefit obligation at end of year | |
$ | 2,944 | | |
$ | 2,573 | |
Amounts recognized in accumulated other comprehensive income
(AOCI) at December 31 are as follows:
| (Dollars in Thousands) | |
2014 | | |
2013 | |
| Loss | |
$ | 334 | | |
$ | 179 | |
| Prior service cost | |
| 152 | | |
| 271 | |
| | |
| | | |
| | |
| Total recognized in AOCI | |
$ | 486 | | |
$ | 450 | |
The following table summarizes the projected and accumulated
benefit obligations at December 31:
| (Dollars in Thousands) |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| Projected benefit obligation |
|
$ |
2,944 |
|
|
$ |
2,573 |
|
| Accumulated benefit obligation |
|
|
2,944 |
|
|
|
2,573 |
|
Estimated future benefit payments as of December 31, 2014 are
as follows:
| (Dollars in Thousands) |
| |
|
|
|
| 2015 |
|
$ |
149,743 |
|
| 2016 |
|
|
149,743 |
|
| 2017 |
|
|
149,743 |
|
| 2018 |
|
|
242,175 |
|
| 2019 |
|
|
242,175 |
|
| 2020-2024 |
|
|
1,210,875 |
|
NOTE 13 – COMMITMENTS AND CONTINGENCIES
The Bank is party to financial instruments
with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit, and involve, to varying degrees, elements of credit risk in
excess of the amount recognized on the consolidated balance sheets.
The Bank’s exposure to credit loss
in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as they do for on-balance-sheet instruments. A summary of the Bank’s off-balance sheet commitments
at December 31, 2014 and December 31, 2013 is as follows:
| (Dollars in Thousands) |
|
|
|
|
|
|
| |
|
December 31,
2014 |
|
|
December 31,
2013 |
|
| |
|
|
|
|
|
|
| Commitments to extend credit |
|
$ |
109,545 |
|
|
$ |
106,017 |
|
| Standby letters of credit |
|
$ |
1,351 |
|
|
$ |
1,733 |
|
Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition established in the contract. Many of the commitments expire
without being drawn upon; therefore total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates
each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension
of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and income-producing commercial properties.
Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan facilities to customers.
Certain executive officers have entered
into employment contracts with the Bank which provide for contingent payments subject to future events.
In connection with certain loans held for
sale, the Bank typically makes representations and warranties that the underlying loans conform to specified guidelines. If the
underlying loans do not conform to the specifications, the Bank may have an obligation to repurchase the loans or indemnify the
purchaser against loss. The Bank believes that the potential for loss under these arrangements is remote. Accordingly, no contingent
liability is recorded in the condensed consolidated financial statements.
At December 31, 2014, the Bank had $11,500
in outstanding borrowings against its $149,700 in established borrowing capacity with the FHLB, as compared to $10,000 outstanding
against a borrowing capacity of $143,100 at December 31, 2013. The Bank’s borrowing facility with the FHLB is subject to
collateral and stock ownership requirements. The Bank also had an available discount window primary credit line with the Federal
Reserve Bank of San Francisco of approximately $52,900, subject to collateral requirements, and $16,000 from correspondent banks
with no balance outstanding on any of these facilities.
The Company is currently not party to any
material pending litigation. However, because of the nature of its activities, the Company may be subject to or threatened with
legal actions in the ordinary course of business. In the opinion of management, liabilities arising from these claims, if any,
will not have a material effect on the results of operations or financial condition of the Company.
NOTE 14 – SIGNIFICANT CONCENTRATION
OF CREDIT RISK
Most of the Bank’s business activity
is with customers and governmental entities located in the states of Washington and Oregon, including investments in state and
municipal securities. Loans to any single borrower or group of borrowers are generally limited by state banking regulations to
20% of the Bank’s shareholder’s equity, excluding accumulated other comprehensive income (loss). Standby letters of
credit were granted primarily to commercial borrowers. The Bank, as a matter of practice, generally does not extend credit to any
single borrower or group of borrowers in excess of $8,500.
NOTE 15 – STOCK BASED COMPENSATION
The Company’s 2011 Equity Incentive Plan, as amended (the
“2011 Plan”), provides for the issuance of up to 900,000 shares in connection with incentive and nonqualified stock
options, restricted stock, restricted stock units and other equity-based awards. Prior to adoption of the 2011 Plan, the Company
made equity-based awards under the Company’s 2000 Stock Incentive Plan, which expired January 1, 2011.
Stock Options
The 2011 Plan authorizes the issuance of
incentive and non-qualified stock options, as defined under current tax laws, to key personnel. Options granted under the 2011
Plan either become exercisable ratably over five years or in a single installment five years from the date of grant.
The Company uses the Black-Scholes option
pricing model to calculate the fair value of stock option awards based on assumptions in the following table. Expected volatility
is based on historical volatility of the Company’s common stock. The expected term of stock options granted is based on the
simplified method, which is the simple average between contractual term and vesting period. The risk-free rate is based on the
expected term of stock options and the applicable U.S. Treasury yield in effect at the time of grant.
| Grant period ended |
|
Expected
Life |
|
Risk Free
Interest Rate |
|
|
Expected
Volatility |
|
|
Dividend
Yield |
|
|
Average
Fair Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2014 |
|
6.5 years |
|
|
2.11 |
% |
|
|
23.23 |
% |
|
|
3.27 |
% |
|
$ |
1.02 |
|
| December 31, 2013 |
|
6.5 years |
|
|
1.36 |
% |
|
|
23.05 |
% |
|
|
4.13 |
% |
|
$ |
0.58 |
|
| December 31, 2012 |
|
6.5 years |
|
|
1.34 |
% |
|
|
22.43 |
% |
|
|
0.00 |
% |
|
$ |
0.77 |
|
A summary of stock option activity as of
December 31, 2014, 2013 and 2012, and changes during the twelve months then ended are presented below:
| |
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
December 31, 2012 |
|
| |
|
Shares |
|
|
Weighted
Average
Exercise
Price |
|
|
Shares |
|
|
Weighted
Average
Exercise
Price |
|
|
Shares |
|
|
Weighted
Average
Exercise
Price |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding beginning of period |
|
|
625,495 |
|
|
$ |
9.53 |
|
|
|
537,107 |
|
|
$ |
11.28 |
|
|
|
586,448 |
|
|
$ |
11.32 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Granted |
|
|
23,500 |
|
|
|
6.13 |
|
|
|
186,000 |
|
|
|
5.05 |
|
|
|
10,500 |
|
|
|
5.00 |
|
| Exercised |
|
|
(4,000 |
) |
|
|
5.00 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Forfeited |
|
|
(7,650 |
) |
|
|
6.89 |
|
|
|
(64,337 |
) |
|
|
11.36 |
|
|
|
(12,550 |
) |
|
|
10.44 |
|
| Expired |
|
|
(70,400 |
) |
|
|
15.17 |
|
|
|
(33,275 |
) |
|
|
9.25 |
|
|
|
(47,291 |
) |
|
|
10.57 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding end of period |
|
|
566,945 |
|
|
$ |
8.75 |
|
|
|
625,495 |
|
|
$ |
9.53 |
|
|
|
537,107 |
|
|
$ |
11.28 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercisable end of period |
|
|
388,345 |
|
|
$ |
10.39 |
|
|
|
328,845 |
|
|
$ |
12.95 |
|
|
|
389,827 |
|
|
$ |
12.98 |
|
A summary of the status of the Company’s non-vested options
as of December 31, 2014 and 2013 and changes during the twelve months then ended, are presented below:
| |
|
December 31, 2014 |
|
|
December 31, 2013 |
|
| |
|
Shares |
|
|
Weighted
Average
Fair Value |
|
|
Shares |
|
|
Weighted
Average
Fair Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Non-vested beginning of period |
|
|
296,650 |
|
|
$ |
0.47 |
|
|
|
147,280 |
|
|
$ |
0.31 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Granted |
|
|
23,500 |
|
|
|
1.02 |
|
|
|
186,000 |
|
|
|
0.57 |
|
| Vested |
|
|
(136,650 |
) |
|
|
0.34 |
|
|
|
(17,875 |
) |
|
|
0.32 |
|
| Forfeited |
|
|
(4,900 |
) |
|
|
0.34 |
|
|
|
(18,755 |
) |
|
|
0.40 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non-vested end of period |
|
|
178,600 |
|
|
$ |
0.65 |
|
|
|
296,650 |
|
|
$ |
0.47 |
|
The following information summarizes information
about stock options outstanding and exercisable at December 31, 2014:
| | |
Options Outstanding | | |
Options Exercisable | |
| Range of exercise prices | |
Number | | |
Weighted
Average
Remaining
Contractual
Term
(Years) | | |
Weighted
Average
Exercise
Price | | |
Number | | |
Weighted
Average
Remaining
Contractual
Term
(Years) | | |
Weighted
Average
Exercise
Price | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| 0.00 – 5.00 | |
175,900 | | |
7.95 | | |
$4.97 | | |
32,800 | | |
7.94 | | |
$4.95 | |
| 5.01 – 10.00 | |
| 197,500 | | |
| 5.54 | | |
| 6.83 | | |
| 162,000 | | |
| 4.85 | | |
| 6.98 | |
| 10.01 - 14.74 | |
| 111,650 | | |
| 2.16 | | |
| 13.69 | | |
| 111,650 | | |
| 2.17 | | |
| 13.69 | |
| 14.75 - 16.00 | |
| 81,895 | | |
| 0.28 | | |
| 14.80 | | |
| 81,895 | | |
| 0.27 | | |
| 14.80 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| 566,945 | | |
| 4.86 | | |
$ | 8.74 | | |
| 388,345 | | |
| 3.37 | | |
$ | 10.39 | |
| | |
December 31,
2014 | | |
December 31,
2013 | |
| | |
| | |
| |
| Aggregate intrinsic value outstanding end of period | |
$ | 306,710 | | |
$ | 303,450 | |
| | |
| | | |
| | |
| Aggregate intrinsic value exercisable end of period | |
$ | 55,390 | | |
$ | 0 | |
The Company accounts for stock based compensation in accordance
with GAAP, which requires measurement of compensation cost for all stock-based awards based on grant date fair value and recognition
of compensation cost over the service period of each award.
Stock-based compensation expense
(Unaudited)
(Dollars in Thousands)
| Twelve months ended December 31, 2014 |
|
Before Tax |
|
|
Tax Effect |
|
|
Net of Tax |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Recognized compensation expense |
|
$ |
67 |
|
|
$ |
23 |
|
|
$ |
44 |
|
| Twelve months ended December 31, 2013 |
|
Before Tax |
|
|
Tax Effect |
|
|
Net of Tax |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Recognized compensation expense |
|
$ |
50 |
|
|
$ |
17 |
|
|
$ |
33 |
|
| |
|
December
31, 2014 |
|
|
December
31, 2013 |
|
| |
|
|
|
|
|
|
| Future compensation expense (1) |
|
$ |
60 |
|
|
$ |
80 |
|
| |
|
|
|
|
|
|
|
|
| Weighted Average Remaining Contractual |
|
|
|
|
|
|
|
|
| Term (Years) |
|
|
1.8 |
|
|
|
1.8 |
|
(1) related to non-vested stock options
Restricted Stock Units
The Company grants restricted stock units
(“RSU”) to employees qualifying for awards under the Company’s Annual Incentive Compensation Plan. Recipients
of RSUs will be issued a specified number of shares of common stock under the 2011 Plan upon the lapse of applicable restrictions.
Outstanding RSUs are subject to forfeiture if the recipient’s employment terminates prior to the expiration of three years
from the date of grant.
The following table summarizes RSU activity
during the twelve months ended December 31, 2014 and 2013:
| |
|
December 31, 2014 |
|
|
December 31, 2013 |
| |
|
Shares |
|
|
Weighted
Average
Grant Price |
|
|
Weighted
Average
Remaining
Contractual
terms (in years) |
|
|
Shares |
|
|
Weighted
Average
Grant Price |
|
|
Weighted
Average
Remaining
Contractual
terms (in years) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding, January 1, 2014 |
|
|
50,024 |
|
|
|
|
|
|
|
|
|
|
|
16,059 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Granted |
|
|
13,624 |
|
|
$ |
5.43 |
|
|
|
|
|
|
|
35,476 |
|
|
$ |
4.93 |
|
|
|
| Converted |
|
|
(476 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
| Forfeited |
|
|
(1,939 |
) |
|
|
|
|
|
|
|
|
|
|
(1,511 |
) |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding end of period |
|
|
61,233 |
|
|
|
|
|
|
|
1.3 |
|
|
|
50,024 |
|
|
|
|
|
|
2.0 |
The following table summarizes RSU compensation
expense during the twelve months ended December 31, 2014 and 2013:
RSU compensation expense
(Unaudited)
(Dollars in Thousands)
| Twelve months ended December 31, 2014 |
|
Before Tax |
|
|
Tax Effect |
|
|
Net of Tax |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| RSU recognized compensation expense |
|
$ |
148 |
|
|
$ |
50 |
|
|
$ |
98 |
|
| Twelve months ended December 31, 2013 |
|
Before Tax |
|
|
Tax Effect |
|
|
Net of Tax |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| RSU recognized compensation expense |
|
$ |
66 |
|
|
$ |
22 |
|
|
$ |
44 |
|
| |
|
December 31, 2014 |
|
|
December 31, 2013 |
|
| |
|
|
|
|
|
|
|
|
| Future compensation expense (1) |
|
$ |
150 |
|
|
$ |
172 |
|
(1) related to non-vested RSU's
NOTE 16 – REGULATORY MATTERS
The Company and the Bank are subject to
various regulatory capital requirements administered by the 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 material
adverse effect on the Company’s consolidated financial statements. Under capital adequacy guidelines on the regulatory framework
for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the
Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s
capital classification is 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 (set forth in the table below)
of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined).
As of December 31, 2014 and 2013, the Bank
was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the institution’s category.
Actual capital amounts and ratios for December
31, 2014 and 2013 are presented in the table below.
| (Dollars in Thousands) |
|
Actual
Amount |
|
|
Ratio |
|
|
Capital
Adequacy
Purposes
Amount |
|
|
Ratio |
|
|
To be well
capitalized under
prompt corrective
action provisions
amount |
|
|
Ratio |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total risk-based capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Company |
|
$ |
79,308 |
|
|
|
13.61 |
% |
|
$ |
46,616 |
|
|
|
8.00 |
% |
|
$ |
n/a |
|
|
|
n/a |
|
| Bank |
|
|
78,681 |
|
|
|
13.52 |
% |
|
|
46,563 |
|
|
|
8.00 |
% |
|
|
58,204 |
|
|
|
10 |
% |
| Tier 1 risk-based capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Company |
|
|
72,011 |
|
|
|
12.36 |
% |
|
|
23,308 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
| Bank |
|
|
71,392 |
|
|
|
12.27 |
% |
|
|
23,282 |
|
|
|
4.00 |
% |
|
|
34,922 |
|
|
|
6 |
% |
| Tier 1 leverage capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Company |
|
|
72,011 |
|
|
|
9.80 |
% |
|
|
27,604 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
| Bank |
|
|
71,392 |
|
|
|
9.73 |
% |
|
|
27,591 |
|
|
|
4.00 |
% |
|
|
34,489 |
|
|
|
5 |
% |
| (Dollars in Thousands) |
|
Actual
Amount |
|
|
Ratio |
|
|
Capital
Adequacy
Purposes
Amount |
|
|
Ratio |
|
|
To be well
capitalized under
prompt corrective
action provisions
amount |
|
|
Ratio |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total risk-based capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Company |
|
$ |
74,477 |
|
|
|
14.11 |
% |
|
$ |
42,237 |
|
|
|
8.00 |
% |
|
$ |
n/a |
|
|
|
n/a |
|
| Bank |
|
|
74,036 |
|
|
|
14.03 |
% |
|
|
42,202 |
|
|
|
8.00 |
% |
|
|
52,753 |
|
|
|
10 |
% |
| Tier 1 risk-based capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Company |
|
|
67,856 |
|
|
|
12.85 |
% |
|
|
21,119 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
| Bank |
|
|
67,420 |
|
|
|
12.78 |
% |
|
|
21,101 |
|
|
|
4.00 |
% |
|
|
31,652 |
|
|
|
6 |
% |
| Tier 1 leverage capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Company |
|
|
67,856 |
|
|
|
9.83 |
% |
|
|
27,604 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
| Bank |
|
|
67,420 |
|
|
|
9.77 |
% |
|
|
27,591 |
|
|
|
4.00 |
% |
|
|
34,489 |
|
|
|
5 |
% |
NOTE 17 – FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
The Company uses an established hierarchy
for measuring fair value that is intended to maximize the use of observable inputs and minimize the use of unobservable inputs.
This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
Level 1 – Valuations based on quoted
prices in active exchange markets for identical assets or liabilities; also includes certain corporate debt securities actively
traded in over-the-counter markets.
Level 2 – Valuations of assets and
liabilities traded in less active dealer or broker markets. Valuations include quoted prices for similar assets and liabilities
traded in the same market; quoted prices for identical or similar instruments in markets that are not active; and model–derived
valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated
by, third-party pricing services. This category generally includes certain U.S. Government, agency and non-agency securities, state
and municipal securities, mortgage-backed securities, corporate securities, and residential mortgage loans held for sale.
Level 3 – Valuation based on unobservable
inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted
cash flow methodologies, yield curves and similar techniques, as well as instruments for which the determination of fair value
requires significant management judgment or estimation. Level 3 valuations incorporate certain assumptions and projections in determining
the fair value assigned to such assets or liabilities, but in all cases are corroborated by external data, which may include third-party
pricing services.
Investment Securities Available-for-Sale
The Company uses an independent pricing
service to assist management in determining fair values of investment securities available-for-sale. This service provides pricing
information by utilizing evaluated pricing models supported with market based information. Standard inputs include benchmark yields,
reported trades, broker/dealer quotes, credit ratings, bids and offers, relative credit information and reference data from market
research publications. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the
use of significant unobservable inputs.
The pricing service provides quoted market
prices when available. Quoted prices are not always available due to bond market inactivity. For securities where quoted prices
or market prices of similar securities are not available, fair values are calculated using discounted cash flows. Discounted cash
flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit
spread and optionality. Additionally, the pricing service may obtain a broker quote when sufficient information is not available
to produce a valuation. Valuations and broker quotes are non-binding and do not represent quotes on which one may execute the disposition
of the assets.
The Company generally obtains one value
from its primary external third-party pricing service. The Company’s third-party pricing service has established processes
for us to submit inquiries regarding quoted prices. The Company’s third-party pricing service will review the inputs to the
evaluation in light of any new market data presented by us. The Company’s third-party pricing service may then affirm the
original quoted price or may update the evaluation on a going forward basis.
On a quarterly basis, management reviews
the pricing information received from the third party-pricing service through a combination of procedures that include an evaluation
of methodologies used by the pricing service, analytical reviews and performance analyses of the prices against statistics and
trends and maintenance of an investment watch list. Based on this review, management determines whether the current placement of
the security in the fair value hierarchy is appropriate or whether transfers may be warranted. As necessary, the Company compares
prices received from the pricing service to discounted cash flow models or through performing independent valuations of inputs
and assumptions similar to those used by the pricing service in order to ensure prices represent a reasonable estimate of fair
value. Although the Company does identify differences from time to time as a result of these validation procedures, the Company
did not make any significant adjustments as of December 31, 2014 or December 31, 2013.
The following table presents the balances
of assets measured at fair value on a recurring basis at December 31, 2014 and December 31, 2013.
| (Dollars in Thousands) |
|
Fair Value Measurements |
|
| |
|
At December 31, 2014 |
|
| Description |
|
Fair Value
12/31/2014 |
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1) |
|
|
Other Observable Inputs
(Level 2) |
|
|
Significant
Unobservable Inputs
(Level 3) |
|
| Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Collateralized mortgage obligations: agency issued |
|
$ |
38,767 |
|
|
$ |
- |
|
|
$ |
38,767 |
|
|
$ |
- |
|
| Collateralized mortgage obligations: non agency |
|
|
527 |
|
|
|
- |
|
|
|
527 |
|
|
|
- |
|
| Mortgage-backed securities: agency issued |
|
|
12,199 |
|
|
|
- |
|
|
|
12,199 |
|
|
|
- |
|
| U.S. Government agency securities |
|
|
8,056 |
|
|
|
- |
|
|
|
8,056 |
|
|
|
- |
|
| State and municipal securities |
|
|
27,891 |
|
|
|
- |
|
|
|
25,741 |
|
|
|
2,150 |
|
| Total assets measured at fair value |
|
$ |
87,440 |
|
|
$ |
- |
|
|
$ |
85,290 |
|
|
$ |
2,150 |
|
| |
|
Fair Value Measurements |
|
| |
|
At December 31, 2013 |
|
| Description |
|
Fair Value
12/31/2013 |
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1) |
|
|
Other Observable Inputs
(Level 2) |
|
|
Significant
Unobservable Inputs
(Level 3) |
|
| Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Collateralized mortgage obligations: agency issued |
|
$ |
38,791 |
|
|
$ |
- |
|
|
$ |
38,791 |
|
|
$ |
- |
|
| Collateralized mortgage obligations: non agency |
|
|
2,011 |
|
|
|
- |
|
|
|
2,011 |
|
|
|
- |
|
| Mortgage-backed securities: agency issued |
|
|
13,389 |
|
|
|
- |
|
|
|
13,389 |
|
|
|
- |
|
| U.S. Government agency securities |
|
|
8,811 |
|
|
|
- |
|
|
|
8,811 |
|
|
|
- |
|
| State and municipal securities |
|
|
32,160 |
|
|
|
- |
|
|
|
30,741 |
|
|
|
1,419 |
|
| Corporate bonds |
|
|
982 |
|
|
|
- |
|
|
|
982 |
|
|
|
- |
|
| Total assets measured at fair value |
|
$ |
96,144 |
|
|
$ |
- |
|
|
$ |
94,725 |
|
|
$ |
1,419 |
|
As of December 31, 2014 and December 31,
2013, the Company had four and two investments, respectively, classified as Level 3 investments which consist of non-rated municipal
bonds for which the Company is the sole owner of the entire bond issue. The valuation of these securities is supported by analysis
prepared by an independent third party. Their approach to determining fair value involves using recently executed transactions
and market quotations for similar securities. As these securities are not rated by the rating agencies and there is no trading
volume, management determined that these securities should be classified as Level 3 within the fair value hierarchy.
The following table presents a reconciliation
of assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the twelve
months ended December 31, 2014 and 2013, respectively. Transfers between level categorizations may occur due to changes in the
availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading
volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example,
in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider
and as a result the price is stale, the security is transferred into Level 3. Transfers in and out of level categorizations are
reported as having occurred at December 31, 2014 and 2013.
| (Dollars in Thousands) |
|
Twelve months ended December 31, |
|
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| Balance beginning of period |
|
$ |
1,419 |
|
|
$ |
1,099 |
|
| Transfers in to level 3 |
|
|
810 |
|
|
|
464 |
|
| Change in FV (included in other comprehensive income) |
|
|
(79 |
) |
|
|
(144 |
) |
| Balance end of period |
|
$ |
2,150 |
|
|
$ |
1,419 |
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring
Basis
Certain assets and liabilities are measured
at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and other real estate owned
(“OREO”). The following methods were used to estimate the fair value of each such class of financial instrument:
Impaired loans – A loan is
considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all
amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are classified
as Level 3 in the fair value hierarchy and are measured based on the present value of expected future cash flows or by the net
realizable value of the collateral if the loan is collateral dependent. In determining the net realizable value of the underlying
collateral, we consider third party appraisals by qualified licensed appraisers, less estimated costs to sell. These appraisals
may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal
process by the appraisers to adjust for differences between the comparable sales and income data available and include consideration
for variations in location, size, and income production capacity of the property. The income approach commonly utilizes a discount
or cap rate to determine the present value of expected future cash flows. Additionally, the appraisals are periodically further
adjusted by the Company in consideration of charges that may be incurred in the event of foreclosure and are based on management’s
historical knowledge, changes in business factors and changes in market conditions. Such discounts are typically significant, and
may range from 10% to 30%.
Impaired loans are reviewed and evaluated
quarterly for additional impairment and adjusted accordingly, based on the same factors identified above. Because of the high degree
of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between
fair value and general economic conditions, we consider the fair value of impaired loans to be highly sensitive to changes in market
conditions.
Other real estate owned –
OREO is initially recorded at the fair value of the property less estimated costs to sell. This amount becomes the property’s
new basis. Management considers third party appraisals in determining the fair value of particular properties. These appraisals
may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal
process by the appraisers to adjust for differences between the comparable sales and income data available and include consideration
for variations in location, size, and income production capacity of the property. Additionally, the appraisals are periodically
further adjusted by the Company based on management’s historical knowledge, changes in business factors and changes in market
conditions. Such adjustments are typically downward, and may range from 10% to 25%.
Any write-downs based on the property fair
value less estimated costs to sell at the date of acquisition are charged to the allowance for loan losses. Management periodically
reviews OREO to ensure the property is carried at the lower of its new basis or fair value, net of estimated costs to sell. Any
additional write-downs based on re-evaluation of the property fair value are charged to non-interest expense. Because of the high
degree of judgment required in estimating the fair value of OREO and because of the relationship between fair value and general
economic conditions, we consider the fair value of OREO to be highly sensitive to changes in market conditions.
The following table presents the Company’s
assets that were held at the end of each period that were measured at fair value on a nonrecurring basis during the twelve months
ended December 31, 2014 and year ended December 31, 2013:
| (Dollars in Thousands) |
|
Fair Value Measurements |
|
| |
|
As of December 31, 2014 |
|
| Description |
|
Fair Value
12/31/2014 |
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1) |
|
|
Other Observable
Inputs (Level 2) |
|
|
Significant
Unobservable
Inputs (Level 3) |
|
| Other real estate owned and foreclosed assets |
|
$ |
139 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
139 |
|
| Loans measured for impairment, net of specific reserves |
|
|
231 |
|
|
|
- |
|
|
|
- |
|
|
|
231 |
|
| Total impaired assets measured at fair value |
|
$ |
370 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
370 |
|
| |
|
Fair Value Measurements |
|
| |
|
As of December 31, 2013 |
|
| Description |
|
Fair Value
12/31/2013 |
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1) |
|
|
Other Observable
Inputs (Level 2) |
|
|
Significant
Unobservable
Inputs (Level 3) |
|
| Other real estate owned and foreclosed assets |
|
$ |
1,960 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,960 |
|
| Loans measured for impairment, net of specific reserves |
|
|
162 |
|
|
|
- |
|
|
|
- |
|
|
|
162 |
|
| Total impaired assets measured at fair value |
|
$ |
2,122 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,122 |
|
Other real estate owned with a pre-foreclosure
loan balance of $969 was acquired during the twelve months ended December 31, 2014. Upon foreclosure, write downs totaling $127
were applied to the allowance for loan losses during the period related to these assets.
The following table presents quantitative
information about Level 3 inputs for financial instruments measured at fair value on a nonrecurring basis at December 31, 2014:
| (Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Description |
|
Fair Value
12/31/2014 |
|
|
Valuation
Technique |
|
Significant
Unobservable
Inputs |
|
Range
(Weighted
Average) |
| Other real estate owned and foreclosed assets |
|
$ |
139 |
|
|
Appraised value |
|
Adjustment for
market conditions |
|
0-9% (2.5%) |
| |
|
|
|
|
|
|
|
|
|
|
| Loans measured for impairment, net of specific reserves |
|
$ |
231 |
|
|
Appraised value |
|
Adjustment for market conditions |
|
0-20% (2.2%) |
Fair Value of Financial Instruments
The following methods and assumptions were
used by the Company in estimating the fair values of financial instruments disclosed in these consolidated financial statements:
Cash and due from
banks, interest bearing deposits in banks, and certificates held for investment
The carrying amounts of cash,
interest bearing deposits at other financial institutions approximate their fair value.
Investment securities available-for-sale
and held-to-maturity
The fair value of all investment
securities are based upon the assumptions market participants would use in pricing the security. Such assumptions include observable
and unobservable inputs such as quoted market prices, dealer quotes and analysis of discounted cash flows.
Federal Home Loan Bank Stock
FHLB stock is carried at cost
which approximates fair value and equals its par value because the shares can only be redeemed with the FHLB at par.
Pacific Coast Bankers’
Bancshares Stock
PCBB stock is carried at cost
which approximates fair value and equals its par value based on the price per share paid at the capital offering concluded during
the current quarter.
Loans, net and loans held
for sale
The fair value of loans is estimated
based on comparable market statistics for loans with similar credit ratings. An additional liquidity discount is also incorporated
to more closely align the fair value with observed market prices. Fair values of loans held for sale are based on a discounted
cash flow calculation using interest rates currently available on similar loans. The fair value was based on an aggregate loan
basis.
Deposits
The fair value of deposits with
no stated maturity date is included at the amount payable on demand. Fair values for fixed rate certificates of deposit are estimated
using a discounted cash flow calculation based on interest rates currently offered on similar certificates.
Borrowings
The fair values of the Company’s
long-term borrowings is estimated using discounted cash flow analysis based on the Company’s incremental borrowing rates
for similar types of borrowing arrangements.
Junior subordinated debentures
The fair value of the junior
subordinated debentures and trust preferred securities is estimated using discounted cash flow analysis based on interest rates
currently available for junior subordinated debentures.
Off-Balance-Sheet Instruments
The fair value of commitments
to extend credit and standby letters of credit was estimated using the rates currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present creditworthiness of the customers. Since the majority
of the Company’s off-balance-sheet instruments consist of non-fee producing, variable-rate commitments, the Company has determined
they do not have a material fair value.
The estimated fair value of the Company’s
financial instruments at December 31, 2014 and December 31, 2013 is as follows:
| (Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, 2014 |
|
| |
|
Carrying Value |
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1) |
|
|
Other
Observable
Inputs (Level 2) |
|
|
Significant
Unobservable
Inputs (Level 3) |
|
|
Total Fair
Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
31,037 |
|
|
$ |
31,037 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
31,037 |
|
| Interest-bearing certificates of deposit (original maturities greater than 90 days) |
|
|
2,727 |
|
|
|
2,727 |
|
|
|
- |
|
|
|
- |
|
|
|
2,727 |
|
| Investment securities available-for-sale |
|
|
87,440 |
|
|
|
- |
|
|
|
85,290 |
|
|
|
2,150 |
|
|
|
87,440 |
|
| Investment securities held-to-maturity |
|
|
1,829 |
|
|
|
- |
|
|
|
1,852 |
|
|
|
- |
|
|
|
1,852 |
|
| Federal Home Loan Bank stock |
|
|
2,896 |
|
|
|
- |
|
|
|
2,896 |
|
|
|
- |
|
|
|
2,896 |
|
| Pacific Coast Bankers Bank stock |
|
|
1,000 |
|
|
|
- |
|
|
|
1,000 |
|
|
|
- |
|
|
|
1,000 |
|
| Loans held-for-sale |
|
|
5,786 |
|
|
|
- |
|
|
|
5,786 |
|
|
|
- |
|
|
|
5,786 |
|
| Loans |
|
|
554,746 |
|
|
|
- |
|
|
|
- |
|
|
|
527,510 |
|
|
|
527,510 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deposits |
|
$ |
639,054 |
|
|
$ |
- |
|
|
$ |
639,537 |
|
|
$ |
- |
|
|
$ |
639,537 |
|
| Long-term borrowings |
|
|
11,453 |
|
|
|
- |
|
|
|
11,583 |
|
|
|
- |
|
|
|
11,583 |
|
| Junior subordinated debentures |
|
|
13,403 |
|
|
|
- |
|
|
|
- |
|
|
|
7,644 |
|
|
|
7,644 |
|
| |
|
As of December 31, 2013 |
|
| |
|
Carrying Value |
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1) |
|
|
Other
Observable
Inputs (Level 2) |
|
|
Significant
Unobservable
Inputs (Level 3) |
|
|
Total Fair
Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
35,948 |
|
|
$ |
35,948 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
35,948 |
|
| Interest-bearing certificates of deposit (original maturities greater than 90 days) |
|
|
2,727 |
|
|
|
2,727 |
|
|
|
- |
|
|
|
- |
|
|
|
2,727 |
|
| Investment securities available-for-sale |
|
|
96,144 |
|
|
|
- |
|
|
|
94,725 |
|
|
|
1,419 |
|
|
|
96,144 |
|
| Investment securities held-to-maturity |
|
|
2,132 |
|
|
|
- |
|
|
|
2,158 |
|
|
|
- |
|
|
|
2,158 |
|
| Federal Home Loan Bank stock |
|
|
3,013 |
|
|
|
- |
|
|
|
3,013 |
|
|
|
- |
|
|
|
3,013 |
|
| Loans held-for-sale |
|
|
7,765 |
|
|
|
- |
|
|
|
7,765 |
|
|
|
- |
|
|
|
7,765 |
|
| Loans |
|
|
496,307 |
|
|
|
- |
|
|
|
- |
|
|
|
473,224 |
|
|
|
473,224 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deposits |
|
$ |
607,347 |
|
|
$ |
|
|
|
$ |
606,654 |
|
|
$ |
- |
|
|
$ |
606,654 |
|
| Long-term borrowings |
|
|
10,000 |
|
|
|
- |
|
|
|
10,195 |
|
|
|
- |
|
|
|
10,195 |
|
| Junior subordinated debentures |
|
|
13,403 |
|
|
|
- |
|
|
|
- |
|
|
|
7,646 |
|
|
|
7,646 |
|
NOTE 18 – EARNINGS PER SHARE
The Company’s basic earnings per
common share is computed by dividing net income available to common shareholders (net income less dividends declared by the weighted
average number of common shares outstanding during the period). The Company’s diluted earnings per common share is computed
similar to basic earnings per common share except that the numerator is equal to net income available to common shareholders and
the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential
common shares had been issued. Included in the denominator are the dilutive effects of stock options computed under the treasury
stock method and outstanding warrants as if converted to common stock.
The following table illustrates the computation
of basic and diluted earnings per share.
| |
|
For the Year Ended |
|
| |
|
December 31, |
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (numerator) |
|
$ |
4,927 |
|
|
$ |
3,731 |
|
|
$ |
4,785 |
|
| Weighted average shares outstanding (denominator) |
|
|
10,256,242 |
|
|
|
10,121,738 |
|
|
|
10,121,853 |
|
| Basic earnings per share |
|
$ |
0.48 |
|
|
$ |
0.37 |
|
|
$ |
0.47 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (numerator) |
|
$ |
4,927 |
|
|
$ |
3,731 |
|
|
$ |
4,785 |
|
| Weighted average shares outstanding |
|
|
10,256,242 |
|
|
|
10,121,738 |
|
|
|
10,121,853 |
|
| Effect of dilutive stock options |
|
|
91,096 |
|
|
|
66,150 |
|
|
|
4,391 |
|
| Weighted average shares outstanding assuming dilution (denominator) |
|
|
10,347,338 |
|
|
|
10,187,888 |
|
|
|
10,126,244 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted earnings per share |
|
$ |
0.48 |
|
|
$ |
0.37 |
|
|
$ |
0.47 |
|
| |
|
December 31,
2014 |
|
|
December 31,
2013 |
|
|
December 31,
2012 |
|
| Shares subject to outstanding options |
|
|
361,545 |
|
|
|
436,495 |
|
|
|
532,106 |
|
| Shares subject to outstanding warrants |
|
|
- |
|
|
|
638,920 |
|
|
|
699,642 |
|
As of December 31, 2014 and 2013, the shares
subject to outstanding options and for December 31, 2013, the shares subject to outstanding warrants, included some options that
had exercise prices in excess of the current market value. Those specific shares are not included in the table above, as exercise
of these options and warrants would not be dilutive to shareholders.
NOTE 19 – BUSINESS COMBINATION
On January 28, 2013, the Bank and Sterling
Savings Bank, a Washington state-chartered bank (“Sterling”), entered into a Purchase and Assumption Agreement (the
“Agreement”) pursuant to which the Bank agreed to purchase from Sterling three branches located in Aberdeen, Washington;
Astoria, Oregon; and Seaside, Oregon; including certain deposit liabilities, loans and other assets and liabilities associated
with such branch locations. The actual amount of loans and deposits, the value of other assets and liabilities transferred
to the Bank and the actual price paid were determined at the time of the closing of the transaction on June 1, 2013, in accordance
with the terms of the Agreement. The purchase price was $976 and exceeded the estimated fair value of tangible net assets
acquired by approximately $1,127, which was recorded as goodwill and intangible assets.
Cash flow information relative to the agreement
is as follows (in thousands):
| Fair value of tangible net assets acquired |
|
$ |
37,533 |
|
| Cash paid for deposit premium |
|
|
(976 |
) |
| Liabilities assumed |
|
|
(37,684 |
) |
| |
|
|
|
|
| Goodwill and intangible assets recorded |
|
$ |
1,127 |
|
The primary purposes of the acquisition
are to expand the Company’s market share in the northern Oregon coast, to provide existing customers with added convenience
and service, and to provide our new customers with the opportunity to enjoy the outstanding personalized service and commitment
of our community-based bank.
Fair value adjustments and related goodwill
were recorded in the statement of financial condition of the Company. The following is a condensed balance sheet disclosing
the estimated fair value amounts of the acquired branches of Sterling assigned to the major consolidated asset and liability captions
at the acquisition date (in thousands):
| Cash and cash equivalents |
|
$ |
31,941 |
|
| Loans receivable |
|
|
3,989 |
|
| Premises and equipment |
|
|
604 |
|
| Goodwill and intangible assets |
|
|
1,127 |
|
| Other assets |
|
|
23 |
|
| |
|
|
|
|
| Total assets |
|
$ |
37,684 |
|
| |
|
|
|
|
| Deposits and accrued interest payable |
|
$ |
37,636 |
|
| Deferred tax liability |
|
|
47 |
|
| Other liabilities |
|
|
1 |
|
| |
|
|
|
|
| Total liabilities and shareholders’ equity |
|
$ |
37,684 |
|
The core deposit intangible asset that
was recognized as part of the business combination was $242 and will be amortized over its estimated useful life of approximately
ten years utilizing an accelerated method. The goodwill of $885 will not be amortized for financial statement purposes; instead,
it will be reviewed annually for impairment.
The fair value of savings and transaction
deposit accounts acquired from Sterling was assumed to approximate the carrying value as these accounts have no stated maturity
and are payable on demand. Certificates of deposit were valued by comparing the contractual cost of the portfolio to
an identical portfolio bearing current market rates. The projected cash flows from maturing certificates were calculated
based on contractual rates. The fair value of certificates of deposit was calculated by discounting their contractual
cash flows at a market rate for a certificate of deposit with a corresponding maturity.
Direct costs related to the Sterling acquisition
were expensed as incurred in the year ended December 31, 2013. These acquisition and integration expenses included salaries
and benefits, technology and communications, occupancy and equipment, professional services and other noninterest expenses. For
the year ended December 31, 2013, the Company incurred $615 of expenses related to acquisition costs.
The following table presents an unaudited
pro forma balance sheet of the Company as if the acquisition of the Sterling branches had occurred on December 31, 2012. The pro
forma balance sheet does not necessarily reflect the combined balance sheet that resulted as of the closing of the branch acquisition
of the Sterling branches.
| Cash and cash equivalents | |
$ | 91,781 | |
| Investment securities | |
| 68,043 | |
| Loans receivable, net | |
| 455,777 | |
| Premises and equipment | |
| 15,197 | |
| Goodwill and intangible assets | |
| 13,677 | |
| Other assets | |
| 36,803 | |
| | |
| | |
| Total assets | |
$ | 681,278 | |
| | |
| | |
| | |
| | |
| Deposits and accrued interest payable | |
$ | 586,092 | |
| Borrowings | |
| 23,903 | |
| Other liabilities | |
| 4,562 | |
| Equity | |
| 66,721 | |
Total liabilities and shareholders’ equity | |
$ | 681,278 | |
The following table presents the unaudited
pro forma results of operations for the twelve months ended December 31, 2012 as if the acquisition of the Sterling branches had
occurred on January 1, 2012. This pro forma information gives effect to certain adjustments, including purchase accounting fair
value adjustments and amortization of the core deposit intangible asset. Significant assumptions utilized include the acquisition
cost noted above, accretion of interest rate fair value adjustment, amortization of the core deposit intangible asset and a 21%
effective tax rate. The pro forma information does not necessarily reflect the results of operations that would have occurred had
the Company purchased and assumed the assets and liabilities of the Sterling branches at January 1, 2012. Cost savings are also
not reflected in the unaudited pro forma amounts for the twelve months ended December 31, 2012.
| Net interest income | |
$ | 25,357 | |
| Noninterest income | |
| 9,776 | |
| Noninterest expense | |
| 30,131 | |
| Income taxes | |
| 1,072 | |
| Net income | |
$ | 3,930 | |
| | |
| | |
| Pro forma earnings per share | |
| | |
| Basic | |
$ | 0.39 | |
| Diluted | |
$ | 0.39 | |
Operations of the branches acquired have
been included in the consolidated financial statements since June 1, 2013. The Company does not consider these branches a separate
reporting unit and does not track the amount of revenue and net income attributable to these branches since the acquisition, two
of which were subsequently consolidated into existing operations. As such, it is impracticable to determine such amounts for the
twelve months ended December 31, 2014 or 2013 for both the balance sheet and income statement.
NOTE 20 – CONDENSED FINANCIAL
INFORMATION-PARENT COMPANY ONLY
PACIFIC FINANCIAL CORPORATION-PARENT COMPANY
ONLY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| ASSETS |
|
|
|
|
|
|
|
|
| Cash and cash equivalents: |
|
$ |
2,585 |
|
|
$ |
2,483 |
|
| Investment in bank |
|
|
84,864 |
|
|
|
79,701 |
|
| Other assets |
|
|
655 |
|
|
|
432 |
|
| |
|
|
|
|
|
|
|
|
| TOTAL ASSETS |
|
$ |
88,104 |
|
|
$ |
82,616 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
| LIABILITIES |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Junior subordinated debentures |
|
$ |
13,403 |
|
|
$ |
13,403 |
|
| Dividends payable |
|
|
2,178 |
|
|
|
2,036 |
|
| Other liabilities |
|
|
40 |
|
|
|
40 |
|
| Total liabilities |
|
|
15,621 |
|
|
|
15,479 |
|
| |
|
|
|
|
|
|
|
|
| SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Shareholders' equity |
|
|
72,483 |
|
|
|
67,137 |
|
| |
|
|
|
|
|
|
|
|
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
|
$ |
88,104 |
|
|
$ |
82,616 |
|
PACIFIC FINANCIAL CORPORATION-PARENT COMPANY
ONLY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
| |
|
For the Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
| Dividend income from the bank |
|
$ |
1,678 |
|
|
$ |
2,400 |
|
|
$ |
3,500 |
|
| Other income |
|
|
7 |
|
|
|
7 |
|
|
|
10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total interest and dividend income |
|
|
1,685 |
|
|
|
2,407 |
|
|
|
3,510 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| EXPENSES |
|
|
902 |
|
|
|
608 |
|
|
|
517 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| INCOME BEFORE PROVISION FOR INCOME TAXES |
|
|
783 |
|
|
|
1,799 |
|
|
|
2,993 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| INCOME TAX BENEFIT |
|
|
215 |
|
|
|
124 |
|
|
|
101 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF THE BANK |
|
|
998 |
|
|
|
1,923 |
|
|
|
3,094 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| EQUITY IN UNDISTRIBUTED INCOME OF THE BANK |
|
|
3,929 |
|
|
|
1,808 |
|
|
|
1,691 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| NET INCOME |
|
$ |
4,927 |
|
|
$ |
3,731 |
|
|
$ |
4,785 |
|
PACIFIC FINANCIAL CORPORATION-PARENT COMPANY ONLY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
| | |
For the Year Ended | |
| | |
December 31, | | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | | |
2012 | |
| NET INCOME | |
$ | 4,927 | | |
$ | 3,731 | | |
$ | 4,785 | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | |
| | | |
| | | |
| | |
| Change in fair value of securities available-for-sale | |
| 1,269 | | |
| (1,875 | ) | |
| 536 | |
| Defined benefit plan | |
| (35 | ) | |
| 85 | | |
| 130 | |
| Total other comprehensive income (loss), net of tax | |
| 1,234 | | |
| (1,790 | ) | |
| 666 | |
| COMPREHENSIVE INCOME | |
$ | 6,161 | | |
$ | 1,941 | | |
$ | 5,451 | |
PACIFIC FINANCIAL CORPORATION AND SUBSIDIARY-PARENT
COMPANY ONLY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
| |
|
For the Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income |
|
$ |
4,927 |
|
|
$ |
3,731 |
|
|
$ |
4,785 |
|
| Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
| Equity in undistributed income of subsidiary |
|
|
(3,929 |
) |
|
|
(1,808 |
) |
|
|
(1,691 |
) |
| Net change in other assets |
|
|
(223 |
) |
|
|
(29 |
) |
|
|
35 |
|
| Net change in other liabilities |
|
|
- |
|
|
|
(96 |
) |
|
|
(1,312 |
) |
| Other — net |
|
|
- |
|
|
|
117 |
|
|
|
24 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
775 |
|
|
|
1,9165 |
|
|
|
1,841 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock issued |
|
|
- |
|
|
|
394 |
|
|
|
- |
|
| Warrants exercised |
|
|
1,366 |
|
|
|
- |
|
|
|
- |
|
| Repurchase of stock (RSU) |
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
| Dividends paid |
|
|
(2,036 |
) |
|
|
- |
|
|
|
(2,024 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash provided by (used in) financing activities |
|
|
(673 |
) |
|
|
394 |
|
|
|
(2,024 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| NET (DECREASE) INCREASE IN CASH |
|
|
102 |
|
|
|
2,309 |
|
|
|
(183 |
) |
| CASH - BEGINNING OF THE PERIOD |
|
|
2,483 |
|
|
|
173 |
|
|
|
356 |
|
| CASH - END OF THE PERIOD |
|
$ |
2,585 |
|
|
$ |
2,483 |
|
|
$ |
173 |
|
QUARTERLY DATA (UNAUDITED)
(Dollars in Thousands, Except per Share
Data)
| |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
| Year Ended December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
$ |
7,085 |
|
|
$ |
7,337 |
|
|
$ |
7,400 |
|
|
$ |
7,336 |
|
| Interest expense |
|
|
530 |
|
|
|
541 |
|
|
|
518 |
|
|
|
536 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
|
6,555 |
|
|
|
6,796 |
|
|
|
6,882 |
|
|
|
6,800 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for credit losses |
|
|
- |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
| Non-interest income |
|
|
1,608 |
|
|
|
2,176 |
|
|
|
2,274 |
|
|
|
2,021 |
|
| Non-interest expense |
|
|
6,830 |
|
|
|
7,066 |
|
|
|
7,133 |
|
|
|
7,127 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
|
|
1,333 |
|
|
|
1,806 |
|
|
|
1,923 |
|
|
|
1,594 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income taxes |
|
|
305 |
|
|
|
403 |
|
|
|
549 |
|
|
|
473 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
1,028 |
|
|
$ |
1,403 |
|
|
$ |
1,374 |
|
|
$ |
1,121 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
0.10 |
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
$ |
0.11 |
|
| Diluted |
|
$ |
0.10 |
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
$ |
0.11 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
$ |
6,271 |
|
|
$ |
6,600 |
|
|
$ |
6,605 |
|
|
$ |
6,814 |
|
| Interest expense |
|
|
689 |
|
|
|
648 |
|
|
|
590 |
|
|
|
563 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
|
5,582 |
|
|
|
5,952 |
|
|
|
6,015 |
|
|
|
6,251 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Recapture of credit losses |
|
|
- |
|
|
|
(450 |
) |
|
|
- |
|
|
|
- |
|
| Non-interest income |
|
|
2,626 |
|
|
|
3,175 |
|
|
|
2,232 |
|
|
|
1,922 |
|
| Non-interest expense |
|
|
7,419 |
|
|
|
7,872 |
|
|
|
7,089 |
|
|
|
7,122 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
|
|
789 |
|
|
|
1,705 |
|
|
|
1,158 |
|
|
|
1,051 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income taxes |
|
|
88 |
|
|
|
373 |
|
|
|
249 |
|
|
|
262 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
701 |
|
|
$ |
1,332 |
|
|
$ |
909 |
|
|
$ |
789 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
0.07 |
|
|
$ |
0.13 |
|
|
$ |
0.09 |
|
|
$ |
0.08 |
|
| Diluted |
|
$ |
0.07 |
|
|
$ |
0.13 |
|
|
$ |
0.09 |
|
|
$ |
0.08 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
$ |
7,034 |
|
|
$ |
7,037 |
|
|
$ |
6,751 |
|
|
$ |
6,673 |
|
| Interest expense |
|
|
984 |
|
|
|
907 |
|
|
|
829 |
|
|
|
764 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
|
6,050 |
|
|
|
6,130 |
|
|
|
5,922 |
|
|
|
5,909 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for (recapture of) credit losses |
|
|
100 |
|
|
|
300 |
|
|
|
- |
|
|
|
(1,500 |
) |
| Non-interest income |
|
|
1,848 |
|
|
|
2,409 |
|
|
|
2,443 |
|
|
|
2,691 |
|
| Non-interest expense |
|
|
6,599 |
|
|
|
6,910 |
|
|
|
7,070 |
|
|
|
7,838 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
|
|
1,199 |
|
|
|
1,329 |
|
|
|
1,295 |
|
|
|
2,262 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income taxes |
|
|
181 |
|
|
|
256 |
|
|
|
280 |
|
|
|
583 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
1,018 |
|
|
$ |
1,073 |
|
|
$ |
1,015 |
|
|
$ |
1,679 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
0.10 |
|
|
$ |
0.11 |
|
|
$ |
0.10 |
|
|
$ |
0.16 |
|
| Diluted |
|
$ |
0.10 |
|
|
$ |
0.11 |
|
|
$ |
0.10 |
|
|
$ |
0.16 |
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 26th day of March, 2015.
| |
PACIFIC FINANCIAL CORPORATION |
| |
(Registrant) |
| |
|
| |
/s/ Dennis A. Long |
| |
Dennis A. Long, President and CEO |
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated,
on the 26th day of March, 2015.
| Principal Executive Officer and Director |
|
Principal Financial and Accounting Officer |
| |
|
|
| /s/ Dennis A. Long |
|
/s/ Douglas N. Biddle |
| Dennis A. Long, President and CEO and Director |
|
Douglas N. Biddle, Chief Financial Officer |
| |
|
|
| |
|
|
| Remaining Directors |
|
|
| |
|
|
| /s/ Gary C. Forcum |
|
/s/ John Van Dijk |
| Gary C. Forcum (Chairman of the Board) |
|
John Van Dijk |
| |
|
|
| |
|
|
| /s/ Randy W. Rognlin |
|
/s/ Edwin Ketel |
| Randy W. Rognlin |
|
Edwin Ketel |
| |
|
|
| |
|
|
| /s/ Randy Rust |
|
/s/ Dwayne Carter |
| Randy Rust |
|
Dwayne Carter |
| |
|
|
| |
|
|
| /s/ Douglas M. Schermer |
|
/s/ Susan C. Freese |
| Douglas M. Schermer |
|
Susan C. Freese |
| |
|
|
| /s/ Denise Portmann |
|
/s/ Dan J. Tupper |
| Denise Portmann |
|
Dan J. Tupper |
| /s/ Kristi Gundersen |
| Kristi Gundersen |
Exhibit Index
| EXHIBIT NO. |
|
EXHIBIT |
| |
|
|
| 3.1 |
|
Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.2 to the Company's
Current Report on Form 8-K dated April 23, 2014 (the "April 2014 8-K"). |
| 3.2 |
|
Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.3 to the April 2014
8-K. |
| 10.1 |
|
Amended and Restated Employment Agreement with Dennis A. Long dated December 29, 2008. Incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2008 (“the 2008 10-K”).* |
| 10.2 |
|
First Amendment to Amended and Restated Employment Agreement with Dennis A. Long dated January 11, 2013. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated January 11, 2013.* |
| 10.3 |
|
Amended and Restated Employment Agreement with Bruce D. MacNaughton dated December 29, 2008. Incorporated by reference to Exhibit 10.3 to the 2008 10-K.* |
| 10.4 |
|
First Amendment to Amended and Restated Employment Agreement with Bruce D. MacNaughton dated January 11, 2013. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated January 11, 2013.* |
| 10.5 |
|
Amended and Restated Employment Agreement with Denise Portmann dated December 29, 2008. Incorporated by reference to Exhibit 10.4 to the 2008 10-K.* |
| 10.6 |
|
First Amendment to Amended and Restated Employment Agreement with Denise J. Portmann dated January 11, 2013. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated January 11, 2013.* |
| 10.7 |
|
Employment Agreement with Douglas N. Biddle dated February 10, 2014. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated February 10, 2014. |
| 10.8 |
|
Supplemental Executive Retirement Plan effective January 1, 2007. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 13, 2008 (the March 2008 8-K).* |
| 10.9 |
|
Individual Participation Agreement (SERP) dated March 13, 2008, between the Company and Dennis A. Long. Incorporated by reference to Exhibit 10.2 to the March 2008 8-K.* |
| 10.10 |
|
Individual Participation Agreement (SERP) dated March 13, 2008, between the Company and John Van Dijk. Incorporated by reference to Exhibit 10.3 to the March 2008 8-K.* |
| 10.11 |
|
Individual Participation Agreement (SERP) dated March 13, 2008, between the Company and Bruce MacNaughton. Incorporated by reference to Exhibit 10.4 to the March 2008 8-K.* |
| 10.12 |
|
Individual Participation Agreement (SERP) dated March 13, 2008, between the Company and Denise Portmann. Incorporated by reference to Exhibit 10.5 to the March 2008 8-K.* |
| 10.13 |
|
Pacific Financial Corporation Annual Incentive Compensation Plan, approved March 9, 2011. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 9, 2011.* |
| 10.14 |
|
Pacific Financial Corporation Amended and Restated 2011 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 |
| 10.15 |
|
Forms of nonqualified option, incentive option and restricted unit award statements for use
under the 2011 Plan. Incorporated by reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.* |
| 21 |
|
Subsidiaries of the Registrant |
| 31.1 |
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) |
| 31.2 |
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) |
| 32 |
|
Certification Pursuant to 18 U.S.C. 1350 |
| 101.INS |
|
XBRL Instance Document. |
| |
|
|
| 101.SCH |
|
XBRL Taxonomy Schema. |
| |
|
|
| 101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase. |
| |
|
|
| 101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase. |
| |
|
|
| 101.LAB |
|
XBRL Taxonomy Extension Label Linkbase. |
| |
|
|
| 101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase. |
* Listed document is a management contract, compensation plan
or arrangement.
Exhibit 21
SCHEDULE OF SUBSIDIARIES
The following is a list of registrant's
subsidiaries at March 26, 2015.
| Name
of Organization |
|
State
of Incorporation or Organization |
| Bank of the Pacific |
|
Washington |
| PFC Statutory Trust I |
|
Connecticut |
| PFC Statutory Trust II |
|
Delaware |
| Coastal Holdings LLC |
|
Washington |
| Coastal Holdings One LLC |
|
Oregon |
| Coastal Holdings Two LLC |
|
Oregon |
| Opportunity Holdings LLC |
|
Washington |
Exhibit
31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
UNDER RULE 13a-14(a)
I, Dennis A. Long, certify that:
1. I
have reviewed this annual report on Form 10-K of Pacific Financial Corporation;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The
registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; |
(b) Designed such internal
control over financial reporting, or caused such internal control over financial reporting to be signed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
(d) Disclosed in this report
any change in the registrant's internal control over financial reporting that occurred during the registrant's most-recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting.
5. The
registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
functions):
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting. |
| Date: March 26, 2015 |
/s/ Dennis A. Long |
| |
Dennis A. Long, President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL
OFFICER
UNDER RULE 13a-14(a)
I, Douglas N. Biddle, certify
that:
1. I have reviewed this annual report on
Form 10-K of Pacific Financial Corporation;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer
and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be signed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most-recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
5. The registrant's other certifying officer
and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting. |
| Date: March 26, 2015 |
/s/ Douglas N. Biddle |
| |
Douglas
N. Biddle, Chief Financial Officer |
Exhibit 32
CERTIFICATIONS UNDER 18 U.S.C. § 1350
The undersigned certify, pursuant to 18 U.S.C. § 1350,
as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that the preceding Annual Report on Form 10-K fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained therein fairly
presents, in all material respects, the financial condition and results of operations of Pacific Financial Corporation.
| /s/ Dennis A. Long |
|
/s/ Douglas N. Biddle |
|
| |
|
|
|
| Dennis A. Long, |
|
Douglas N. Biddle, |
|
| President and |
|
Executive Vice President and |
|
Chief Executive Officer
March 26, 2015 |
|
Chief Financial Officer
March 26, 2015 |
|
Pacific Financial (QX) (USOTC:PFLC)
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