SECURITIES & EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K/A
(Amendment No. 1)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
COMMISSION FILE NUMBER 0-30106
PACIFIC CONTINENTAL CORPORATION
(Exact name of registrant as specified in its charter)
OREGON 93-1269184
(State of Incorporation) (IRS Employer Identification No)
111 West 7th Avenue
Eugene, Oregon 97401
(Address of principal executive offices)
(541) 686-8685
(Registrant’s telephone number)
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, No par value per share Nasdaq Global Select Market
Securities registered pursuant to 12(g) of the Act:
None
Indicate by check mark if 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 report pursuant to Section 13 or Section 15(d) of the Act Yes __No X
Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___
Check if there is no disclosure of delinquent filers in response to item 405 of Regulation S-K contained in this form, and no disclosure will 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. ( )
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer __ Accelerated filer X Non-accelerated filer __ Smaller Reporting Company __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Yes __ No X
The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2008 (the last business day of the most recent second quarter) was $154,698,279 based on the closing price as quoted on the NASDAQ Global Market on that date.
The number of shares outstanding of each of the registrant’s classes of common stock, as of March 6, 2009, was 12,862,691 shares of no par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference information from the registrant’s definitive proxy statement for the 2009 annual meeting of shareholders.
EXPLANATORY NOTE
On March 13, 2009 Pacific Continental Corporation (the “Company”) filed with the Securities and Exchange Commission its Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the “10-K Report”). We are filing this Amendment No. 1 (this “Amendment”) to the 10-K Report to (i) amend Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Item 9A (Controls and Procedures) to reflect certain technical changes; and (ii) Item 15 (Exhibits and Financial Statement Schedules) to re-file the consent of the independent auditors to include the Company’s S-8 Registration Statements which were inadvertently omitted from the original consent.
No other revisions or amendments have been made to Part II or Part IV of the 10-K Report. This Amendment does not reflect events occurring after March 13, 2009, the date of the original filing of our 10-K Report, or modify or update those disclosures that may have been affected by subsequent events. In addition, currently-dated certifications from our Chief Executive Officer and Chief Financial Officer have been included as exhibits to this Amendment.
PACIFIC CONTINENTAL CORPORATION
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT
TABLE OF CONTENTS
The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the audited financial statements and the notes included later in this report. All numbers, except per share data, are expressed in thousands of dollars.
In addition to historical information, this report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about management’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations in the forward-looking statements, including those set forth in this report, or the documents incorporated by reference:
| o | the risks associated with lending and potential adverse changes in credit quality; |
| o | increased loan delinquency rates; |
| o | the risks presented by a continued economic slowdown, which could adversely affect credit quality, loan collateral values, investment values, liquidity levels, and loan originations; |
| o | changes in market interest rates, which could adversely affect our net interest income and profitability; |
| o | legislative or regulatory changes that adversely affect our business or our ability to complete pending or prospective future acquisitions; |
| o | reduced demand for banking products and services; |
| o | the risks presented by public stock market volatility, which could adversely affect the Company’s stock value and the ability to raise capital in the future; |
| o | competition from other financial services companies in our markets; and |
| o | the Company’s success in managing risks involved in the foregoing. |
Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Risk Factors in Item 1A. Please take into account that forward-looking statements speak only as of the date of this report or documents incorporated by reference. The Company does not undertake any obligation to publicly correct or update any forward-looking statement if we later become aware that it is not likely to be achieved.
HIGHLIGHTS
| | | | | | | | | % Change | | | | | | % Change | |
| | | 2008 | | | 2007 | | | 2008 vs. 2007 | | | 2006 | | | 2007 vs. 2006 | |
Operating revenue (1) | | $ | 53,540 | | | $ | 47,351 | | | | 13 | % | | $ | 44,458 | | | | 7 | % |
| Net income | | $ | 12,939 | | | $ | 12,935 | | | | 0 | % | | $ | 12,655 | | | | 2 | % |
| | | | | | | | | | | | | | | | | | | | | |
Earnings per share (2) | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 1.08 | | | $ | 1.09 | | | | -1 | % | | $ | 1.09 | | | | 0 | % |
| Diluted | | $ | 1.08 | | | $ | 1.08 | | | | 0 | % | | $ | 1.08 | | | | 0 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Assets, period-end | | $ | 1,090,843 | | | $ | 949,271 | | | | 15 | % | | $ | 885,351 | | | | 7 | % |
| Deposits, period-end | | $ | 722,437 | | | $ | 644,424 | | | | 12 | % | | $ | 641,272 | | | | 0 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Return on assets | | | 1.27 | % | | | 1.43 | % | | | | | | | 1.53 | % | | | | |
| Return on equity | | | 11.57 | % | | | 12.55 | % | | | | | | | 14.02 | % | | | | |
Return on tangible equity (3) | | | 14.56 | % | | | 16.23 | % | | | | | | | 19.12 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
(1) Operating income is defined as net interest income plus noninterest income. | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
(2) Per share data for 2006 was retroactively adjusted to reflect the 10% stock dividend paid in June 2007. | |
| | | | | | | | | | | | | | | | | | | | | |
(3) Tangible equity excludes goodwill and core deposit intangible related to acquisitions. | |
| | | | | | | | | | | | | | | | | | | | | |
The Company earned $12,935 in 2007 compared to $12,655 in 2006. Growth in operating revenue was primarily responsible for the increased earnings in 2007 over 2006. Operating revenues were $47,351 in 2007, up $2,893 or 7% over 2006. Growth in operating revenues resulted from increased net interest income, which accounted for 92% of total operating revenue in 2007. While average earning assets increased 10% in 2007 over 2006, growth in net interest income in 2007 was slowed by an 8 basis point compression in the net interest margin.
Period-end assets at December 31, 2008 were $1,090,843, compared to $949,271 at December 31, 2007. Core deposits, which are defined as demand deposits, interest checking, money market accounts, and local time deposits (including local time deposits over $100 thousand) constitute 85% of December 31, 2008 outstanding deposits. Non-interest bearing deposits were $178,957 or 25% of total deposits at year-end December 31, 2008.
During 2009, the Company believes the following factors could impact reported financial results:
| § | The current national, regional, and local recession and the effect on loan demand, the credit quality of existing clients with lending relationships, and vacancy rates of commercial real estate properties, since a significant portion of our loan portfolio is secured by real estate. |
| § | A slowing real estate market and increases in residential home inventories for sale and the impact on residential construction lending, delinquency and default rates of existing residential construction loans in the Bank’s portfolio, residential mortgage lending, and refinancing activities of existing homeowners. |
| § | The ability to grow core deposits during 2009 in a highly competitive environment where many financial institutions are experiencing liquidity problems. |
| § | The availability of alternative funding sources due to disruption in the financial and capital markets flowing from the significant downturn in the housing industry |
| § | The ability to manage noninterest expense growth in light of anticipated significant increases in regulatory costs. |
| § | The ability to attract and retain qualified and experienced bankers in all markets. |
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The SEC defines “critical accounting policies” as those that require the application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2008 in Item 8 of this report. Management believes that the following policies and those disclosed in the Notes to Consolidated Financial Statements should be considered critical under the SEC definition:
Allowance for Loan Losses and Reserve for Unfunded Commitments
The allowance for outstanding loans is classified as a contra-asset account offsetting outstanding loans, and the allowance for unfunded commitments is classified as an “other” liability on the balance sheet. The allowance for loan losses is established through a provision for loan losses charged against earnings. The balances of the allowance for loan losses for outstanding loans and unfunded commitments are maintained at an amount management believes will be adequate to absorb known and inherent losses in the loan portfolio and commitments to loan funds. The appropriate balance of the allowance for loan losses is determined by applying loss factors to the credit exposure from outstanding loans and unfunded loan commitments. Estimated loss factors are based on subjective measurements including management’s assessment of the internal risk classifications, changes in the nature of the loan portfolios, industry concentrations, and the impact of current local, regional, and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company’s consolidated financial statements, results of operations, or liquidity.
Goodwill and Intangible Assets
At December 31, 2008, the Company had $22,904 in goodwill and other intangible assets. SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis ([and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow of forecasted earnings, estimated sales price multiples based on recent observable market transactions and market capitalization based on current stock prices. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth, the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the Company’s single reporting unit. We allocate goodwill to reporting units based on the reporting unit expected to benefit from the combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach.
Share-based Compensation
We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Liability classified share-based awards are remeasured at fair value each reporting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected dividends. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.
The Company adopted SFAS 123(R) using the modified prospective method. Therefore, previously reported financial data was not restated, and expenses related to equity-based payments granted and vesting during 2006, 2007, and 2008 were recorded as compensation expense.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2008 in item 8 of this report. None of these pronouncements are expected to have a significant effect on the Company’s financial condition or results of operations.
RESULTS OF OPERATIONS
Net Interest Income
The largest component of the Company’s earnings is net interest income. Net interest income is the difference between interest income derived from earning assets, principally loans, and the interest expense associated with interest-bearing liabilities, principally deposits. The volume and mix of earning assets and funding sources, market rates of interest, demand for loans, and the availability of deposits affect net interest income.
4th Quarter 2008 Compared to 4th Quarter 2007
Two tables follow which analyze the changes in net interest income for the fourth quarter 2008 and fourth quarter 2007. Table I “Average Balance Analysis of Net Interest Earnings”, provides information with regard to average balances of assets and liabilities, as well as associated dollar amounts of interest income and interest expense, relevant average yields or rates, and net interest income as a percent of average earning assets. Table II “Analysis of Changes in Interest Income and Interest Expense”, shows the increase (decrease) in the dollar amount of interest income and interest expense and the differences attributable to changes in either volume or rates.
The Bank’s net interest margin for the fourth quarter 2008 was 5.28% compared to 5.15% for the fourth quarter 2007. Table I shows that earning asset yields for the fourth quarter 2008 of 6.63% were down 135 basis points from fourth quarter 2007 earning asset yields due primarily to a 144 basis point decline in the yield on net loans. The decline in loan yields was due to the rapid decline in market interest rates during 2008, which lowered yields on the Bank’s variable rate loan portfolio. However, the Bank’s practice of including floors on most of its variable rate loans mitigated additional declines in loan yields during this falling rate environment. During the third and fourth quarters 2008, loan yields stabilized due to the activation of interest rate floors on approximately $280,000 of the Bank’s variable rate loan portfolio, thus protecting the net interest margin.
Table I shows that the rates paid on interest-bearing core deposits moved down faster than yields on earning assets as evidenced by the 168 basis point decline from 3.24% to 1.56%. In addition, the cost of alternative funding has moved down at a faster rate than core deposits, down 296 basis points from 4.88% to 1.92%. This rapid fall in the cost of alternative funding was due to a planned strategy to maintain a relatively short maturity structure on the Bank’s alternative funding, which permitted the Bank to refinance this funding at consistently lower rates during a rapidly declining interest rate environment. Overall, the cost of interest-
bearing liabilities of the Bank, which includes both core deposits and alternative funding, has fallen by 205 basis points in fourth quarter 2008 from fourth quarter 2007.
Table I also shows the difference between the cost of interest-bearing core deposits and alternative funding. Overall, interest-bearing core deposits have a rate of 1.56% or 36 basis points lower than alternative funding costs at 1.92%. However, this spread between core deposit rates and alternative funding rates has compressed significantly during the last half of 2008 when compared to the first half of the year when this spread ranged between 140 and 150 basis points. This narrowing spread is again the result of the relatively short maturity structure of the Bank’s alternative funding, Federal Reserve actions to lower rates during the fourth quarter 2008, and the relatively high cost of core deposits in a very competitive rate environment.
Table II shows the changes in net interest income due to rate and volume for the quarter ended December 31, 2008. Interest income including loan fees for the fourth quarter 2008 declined by $806 from the same period last year. Higher volumes of earning assets increased interest income by $2,605, while lower yields on earning assets, primarily loans, decreased interest income by $3,411. The rate/volume analysis shows that interest expense for the quarter ended December 31, 2008 decreased by $2,807 from last year, as changes in mix and higher volumes caused interest expense to increase by $1,496, which was more than offset by a decrease in interest expense of $4,303 due to lower rates. Most of the decline in interest expense was due to lower rates and was in the Bank’s core deposit base, which illustrates the Bank’s ability to quickly reprice its core deposits. In addition, the Bank also benefited from the short maturity structure of its alternative funding, which permitted refinancing at lower rates in a rapidly falling interest rate environment.
Average Balance Analysis of Net Interest Earnings
(dollars in thousands)
| | | Quarter Ended December 31, 2008 | | | | | | Quarter Ended December 31, 2007 | | | | |
| | | | | | Interest | | | Average | | | | | | Interest | | | Average | |
| | | Average | | | Income or | | | Yields or | | | Average | | | Income or | | | Yields or | |
| | | Balance | | | Expense | | | Rates | | | Balance | | | Expense | | | Rates | |
| Interest Earning Assets | | | | | | | | | | | | | | | | | | |
| Federal funds sold and interest- | | | | | | | | | | | | | | | | | | |
| bearing deposits in banks | | $ | 497 | | | $ | 2 | | | | 1.60 | % | | $ | 809 | | | $ | 10 | | | | 4.90 | % |
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable (1) | | | 57,972 | | | | 627 | | | | 4.30 | % | | | 52,756 | | | | 622 | | | | 4.68 | % |
| Tax-exempt | | | 5,187 | | | | 49 | | | | 3.76 | % | | | 5,247 | | | | 49 | | | | 3.71 | % |
| Loans, net of allowance | | | | | | | | | | | | | | | | | | | | | | | | |
| for loan losses(2)(3)(4) | | | 929,522 | | | | 15,866 | | | | 6.79 | % | | | 803,999 | | | | 16,669 | | | | 8.23 | % |
| Total interest earning assets | | | 993,178 | | | | 16,544 | | | | 6.63 | % | | | 862,811 | | | | 17,350 | | | | 7.98 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-Interest Earning Assets | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | 17,928 | | | | | | | | | | | | 19,623 | | | | | | | | | |
| Premises and equipment | | | 20,892 | | | | | | | | | | | | 20,856 | | | | | | | | | |
| Goodwill & other intangibles | | | 22,935 | | | | | | | | | | | | 23,159 | | | | | | | | | |
| Interest receivable and other | | | 14,845 | | | | | | | | | | | | 6,925 | | | | | | | | | |
| Total non interest earning assets | | | 76,600 | | | | | | | | | | | | 70,563 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 1,069,778 | | | | | | | | | | | $ | 933,374 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Money market and NOW accounts | | $ | 382,144 | | | $ | (1,367 | ) | | | -1.42 | % | | $ | 378,845 | | | $ | (3,066 | ) | | | -3.21 | % |
| Savings deposits | | | 21,058 | | | | (39 | ) | | | -0.74 | % | | | 20,650 | | | | (82 | ) | | | -1.58 | % |
| Time deposits - core (5) | | | 44,776 | | | | (355 | ) | | | -3.15 | % | | | 38,313 | | | | (424 | ) | | | -4.39 | % |
| Total interest-bearing core deposits | | | 447,978 | | | | (1,761 | ) | | | -1.56 | % | | | 437,808 | | | | (3,572 | ) | | | -3.24 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Time deposits - non-core | | | 72,052 | | | | (536 | ) | | | -2.96 | % | | | 49,588 | | | | (651 | ) | | | -5.21 | % |
| Federal funds purchased | | | 9,005 | | | | (24 | ) | | | -1.06 | % | | | 16,579 | | | | (212 | ) | | | -5.07 | % |
| FHLB & FRB borrowings | | | 239,599 | | | | (904 | ) | | | -1.50 | % | | | 135,748 | | | | (1,594 | ) | | | -4.66 | % |
| Junior subordinated debentures | | | 8,248 | | | | (125 | ) | | | -6.03 | % | | | 8,248 | | | | (128 | ) | | | -6.16 | % |
| Total interest-bearing alternative funding | | | 328,904 | | | | (1,589 | ) | | | -1.92 | % | | | 210,163 | | | | (2,585 | ) | | | -4.88 | % |
| Total interest-bearing liabilities | | | 776,882 | | | | (3,350 | ) | | | -1.72 | % | | | 647,971 | | | | (6,157 | ) | | | -3.77 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | 170,897 | | | | | | | | | | | | 173,706 | | | | | | | | | |
| Interest payable and other | | | 7,040 | | | | | | | | | | | | 4,326 | | | | | | | | | |
| Total noninterest liabilities | | | 177,937 | | | | | | | | | | | | 178,032 | | | | | | | | | |
| Total liabilities | | | 954,819 | | | | | | | | | | | | 826,003 | | | | | | | | | |
| Stockholders' equity | | | 114,959 | | | | | | | | | | | | 107,371 | | | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 1,069,778 | | | | | | | | | | | $ | 933,374 | | | | | | | | | |
| Net Interest Income | | | | | | $ | 13,194 | | | | | | | | | | | $ | 11,193 | | | | | |
| Net Interest Income as a Percent of Earning Assets | | | | 5.28 | % | | | | | | | | | | | 5.15 | % | | | | |
| (1) Federal Home Loan Bank stock is included in securities available for sale. | | | | | | | | | | | | | |
| (2) Nonaccrual loans have been included in average balance totals. | | | | | | | | | | | | | | | | | |
| (3) Interest income includes recognized loan origination fees of $224 and $447 for the three months ended | | | | | |
| December 31, 2008 and 2007, respectively. | | | | | | | | | | | | | | | | | | | | | |
| (4) Total includes loans held for sale. | | | | | | | | | | | | | | | | | | | | | | | | |
| (5) Core time deposits include all non-public time deposits, including non-public time deposits over $100. | | | | | |
Table II
Analysis of Changes in Interest Income and Interest Expense
(dollars in thousands)
| | Three Months Ended December 31, 2008 compared to December 31, 2007 | |
| | | Increase (decrease) due to | | | | |
| | | Volume | | | Rate | | | Net | |
| Interest earned on: | | | | | | | | | |
| Federal funds sold and interest | | | | | | | | | |
| bearing deposits in banks | | $ | (4 | ) | | $ | (4 | ) | | $ | (8 | ) |
| Securities available-for-sale: | | | | | | | | | | | | |
| Taxable | | | 60 | | | | (55 | ) | | | 5 | |
| Tax-exempt | | | (1 | ) | | | 1 | | | | - | |
| Loans, net of allowance for loan losses | | | 2,550 | | | | (3,353 | ) | | | (803 | ) |
| | | | | | | | | | | | | |
| Total interest income | | $ | 2,605 | | | $ | (3,411 | ) | | $ | (806 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Interest paid on: | | | | | | | | | | | | |
| Money market and NOW accounts | | | 18 | | | | (1,717 | ) | | | (1,699 | ) |
| Savings deposits | | | 1 | | | | (44 | ) | | | (43 | ) |
| Time deposits - core | | | 70 | | | | (139 | ) | | | (69 | ) |
| Total interest-bearing core deposits | | | 89 | | | | (1,900 | ) | | | (1,811 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Time deposits - non-core | | | 292 | | | | (407 | ) | | | (115 | ) |
| Federal funds purchased | | | (97 | ) | | | (91 | ) | | | (188 | ) |
| FHLB & FRB borrowings | | | 1,212 | | | | (1,902 | ) | | | (690 | ) |
| Junior subordinated debentures | | | - | | | | (3 | ) | | | (3 | ) |
| Total interest-bearing alternative funding | | | 1,407 | | | | (2,403 | ) | | | (996 | ) |
| | | | | | | | | | | | | |
| Total interest expense | | $ | 1,496 | | | $ | (4,303 | ) | | $ | (2,807 | ) |
| | | | | | | | | | | | | |
| Net interest income | | $ | 1,109 | | | $ | 892 | | | $ | 2,001 | |
| | | | | | | | | | | | | |
2008 Compared to 2007
Two tables follow which analyze the changes in net interest income for the years 2008, 2007, and 2006. Table III “Average Balance Analysis of Net Interest Earnings”, provides information with regard to average balances of assets and liabilities, as well as associated dollar amounts of interest income and interest expense, relevant average yields or rates, and net interest income as a percent of average earning assets. Table IV, “Analysis of Changes in Interest Income and Interest Expense”, shows the increase (decrease) in the dollar amount of interest income and interest expense and the differences attributable to changes in either volume or rates.
The net interest margin for the full year 2008 was 5.21%, a decline of 1 basis point from the 5.22% net interest margin reported for the year 2007. Table III shows that earning asset yields declined by 134 basis points for the year 2008 when compared to 2007 from 8.31% to 6.97%. The decline in earning assets yields was due primarily to the 141 basis point drop in yields on loans, which resulted from the rapidly declining interest rate environment experienced throughout 2008 that lowered yields on the Bank’s variable rate loan portfolio. As noted above, the Bank’s use of interest rate floors on its variable rate loan portfolio mitigated further decline in loan yields during the last half of 2008.
Table III also shows the overall cost of interest-bearing liabilities for the year 2008 was down 182 basis points from 4.10% in 2007 to 2.28% in 2008. This decline can be also be attributed to the falling rate environment during 2008, plus the relatively short-maturity structure of the Bank’s alternative funding,
which permitted rapid refinancing of funding at much lower rates throughout the year. Table III also illustrates the difference between the cost of interest-bearing core deposits for the year 2008 as compared to the cost of interest-bearing alternative funding. The cost of interest-bearing core deposits was 1.85% or 108 basis points less than the 2.93% cost of alternative funding.
The year-to-date December 31, 2008 rate/volume analysis shows that interest income including loan fees declined by $3,221 from last year. Higher volumes of earning assets increased interest income by $9,047 and lower yields on loans decreased interest income by $12,268. The rate/volume analysis shows that interest expense for the year 2008 decreased by $9,066 from last year, as higher volumes on all deposit categories caused interest expense to increase by $5,045, which was more than offset by lower rates, which decreased interest expense by $14,111.
2007 Compared to 2006
The net interest margin for the full year 2007 was 5.22%, a decline of 8 basis points from the 5.30% net interest margin reported for the year 2006. Table III shows that earning asset yields improved by 11 basis points for the year 2007 when compared to 2006 from 8.20% to 8.31%. Compression in the net interest margin was primarily due to the increase in the Bank’s cost of funding, which more than offset the growth in earning asset yields. Table III shows the overall cost of interest-bearing liabilities for the year 2007 was up 24 basis points from 3.86% in 2006 to 4.10% in 2007. Table III also illustrates the difference between the cost of interest-bearing core deposits for the year 2007 as compared to the cost of interest-bearing alternative funding. The cost of interest-bearing core deposits was 3.61% or 150 basis points less than the 5.11% cost of alternative funding.
The year-to-date December 31, 2007 rate/volume analysis shows that interest income, including loan fees, improved by $7,194 over 2006. Higher volumes of earning assets increased interest income by $6,301 and higher yields on loans increased interest income by $893. The rate/volume analysis shows that interest expense for the year 2007 increased by $3,825 over last year, as higher volumes on all deposit categories caused interest expense to increase by $2,157, combined with higher rates, which increased interest expense by $1,668.
| Table III | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Average Balance Analysis of Net Interest Earnings | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2008 | | | | | | | | | 2007 | | | | | | | | | 2006 | | | | |
| | | Average | | | Interest | | | Average | | | Average | | | Interest | | | Average | | | Average | | | Interest | | | Average | |
| | | Balance | | | Income/(Expense) | | | Yield/(Cost) | | | Balance | | | Income/(Expense) | | | Yield/(Cost) | | | Balance | | | Income/(Expense) | | | Yield/(Cost) | |
| | | (dollars in thousands) | | | (dollars in thousands) | | | (dollars in thousands) | |
| Interest Earning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal funds sold and interest- | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| bearing deposits in banks | | $ | 554 | | | $ | 20 | | | | 3.61 | % | | $ | 981 | | | $ | 51 | | | | 5.20 | % | | $ | 960 | | | $ | 44 | | | | 4.58 | % |
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable (1) | | | 57,260 | | | | 2,682 | | | | 4.68 | % | | | 41,112 | | | | 1,837 | | | | 4.47 | % | | | 38,855 | | | | 1,546 | | | | 3.98 | % |
| Tax-exempt | | | 5,300 | | | | 196 | | | | 3.70 | % | | | 5,226 | | | | 156 | | | | 2.99 | % | | | 3,302 | | | | 125 | | | | 3.79 | % |
| Loans, net of allowance for loan | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| losses(2)(3)(4) | | | 882,742 | | | | 63,047 | | | | 7.14 | % | | | 785,132 | | | | 67,122 | | | | 8.55 | % | | | 712,563 | | | | 60,257 | | | | 8.46 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest earning assets | | | 945,856 | | | | 65,945 | | | | 6.97 | % | | | 832,451 | | | | 69,166 | | | | 8.31 | % | | | 755,680 | | | | 61,972 | | | | 8.20 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non Earning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | 18,241 | | | | | | | | | | | | 21,662 | | | | | | | | | | | | 23,272 | | | | | | | | | |
| Premises and equipment | | | 20,955 | | | | | | | | | | | | 19,755 | | | | | | | | | | | | 17,694 | | | | | | | | | |
| Goodwill & other intangibles | | | 23,018 | | | | | | | | | | | | 23,376 | | | | | | | | | | | | 24,057 | | | | | | | | | |
| Interest receivable and other | | | 10,970 | | | | | | | | | | | | 6,688 | | | | | | | | | | | | 4,968 | | | | | | | | | |
| Total non interest earning assets | | | 73,184 | | | | | | | | | | | | 71,481 | | | | | | | | | | | | 69,991 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 1,019,040 | | | | | | | | | | | $ | 903,932 | | | | | | | | | | | $ | 825,671 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Money market and NOW accounts | | $ | 379,657 | | | $ | (6,584 | ) | | | -1.73 | % | | $ | 364,780 | | | $ | (13,358 | ) | | | -3.66 | % | | $ | 307,054 | | | $ | (10,551 | ) | | | -3.44 | % |
| Savings deposits | | | 21,228 | | | | (183 | ) | | | -0.86 | % | | | 24,309 | | | | (486 | ) | | | -2.00 | % | | | 23,559 | | | | (360 | ) | | | -1.53 | % |
| Time deposits - core | | | 42,566 | | | | (1,427 | ) | | | -3.35 | % | | | 32,589 | | | | (1,381 | ) | | | -4.24 | % | | | 40,989 | | | | (1,466 | ) | | | -3.58 | % |
| Total interest-bearing core deposits | | | 443,451 | | | | (8,194 | ) | | | -1.85 | % | | | 421,678 | | | | (15,225 | ) | | | -3.61 | % | | | 371,602 | | | | (12,377 | ) | | | -3.33 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Time deposits - non-core | | | 56,380 | | | | (1,948 | ) | | | -3.46 | % | | | 63,918 | | | | (3,347 | ) | | | -5.24 | % | | | 71,954 | | | | (3,504 | ) | | | -4.87 | % |
| Federal funds purchased | | | 22,094 | | | | (578 | ) | | | -2.62 | % | | | 10,128 | | | | (539 | ) | | | -5.32 | % | | | 7,580 | | | | (380 | ) | | | -5.01 | % |
| FHLB & FRB borrowings | | | 202,293 | | | | (5,456 | ) | | | -2.70 | % | | | 123,597 | | | | (6,121 | ) | | | -4.95 | % | | | 108,324 | | | | (5,144 | ) | | | -4.75 | % |
| Trust preferred | | | 8,248 | | | | (498 | ) | | | -6.04 | % | | | 8,248 | | | | (508 | ) | | | -6.16 | % | | | 8,248 | | | | (510 | ) | | | -6.18 | % |
| Total interest-bearing alternative funding | | | 289,015 | | | | (8,480 | ) | | | -2.93 | % | | | 205,891 | | | | (10,515 | ) | | | -5.11 | % | | | 196,106 | | | | (9,538 | ) | | | -4.86 | % |
| Total interest-bearing liabilities | | | 732,466 | | | | (16,674 | ) | | | -2.28 | % | | | 627,569 | | | | (25,740 | ) | | | -4.10 | % | | | 567,708 | | | | (21,915 | ) | | | -3.86 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | 169,792 | | | | | | | | | | | | 169,035 | | | | | | | | | | | | 162,259 | | | | | | | | | |
| Interest payable and other | | | 4,914 | | | | | | | | | | | | 4,239 | | | | | | | | | | | | 5,466 | | | | | | | | | |
| Total noninterest-bearing liabilities | | | 174,706 | | | | | | | | | | | | 173,274 | | | | | | | | | | | | 167,725 | | | | | | | | | |
| Total liabilities | | | 907,172 | | | | | | | | | | | | 800,843 | | | | | | | | | | | | 735,433 | | | | | | | | | |
| Stockholders' equity | | | 111,868 | | | | | | | | | | | | 103,089 | | | | | | | | | | | | 90,238 | | | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 1,019,040 | | | | | | | | | | | $ | 903,932 | | | | | | | | | | | $ | 825,671 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Interest Income | | | | | | $ | 49,271 | | | | | | | | | | | $ | 43,426 | | | | | | | | | | | $ | 40,057 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Interest Income as a Percent of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Earning Assets | | | | | | | 5.21 | % | | | | | | | | | | | 5.22 | % | | | | | | | | | | | 5.30 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) Federal Home Loan Bank stock is included in securities available for sale. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (2) Nonaccrual loans have been included in average balance totals. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (3) Interest income includes recognized loan origination fees of $1,843, $2,065 and $2,099 for the years ended 2008, 2007, and 2006, respectively. | | | | | | | | | | | | | |
| (4) Total includes loans held for sale. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (5) Core time deposits include all local time deposits, including local time deposits over $100. | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table IV | | | | | | | | | | | | | | | | | | |
| Analysis of Changes in Interest Income and Interest Expense | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | 2008 compared to 2007 Increase (decrease) due to | | | Increase (decrease) due to | |
| | | Volume | | | Rate | | | Net | | | Volume | | | Rate | | | Net | |
| | | (dollars in thousands) | |
| Interest earned on: | | | | | | | | | | | | | | | | | | |
| Federal funds sold and interest | | | | | | | | | | | | | | | | | | |
| bearing deposits in banks | | $ | (22 | ) | | $ | (9 | ) | | $ | (31 | ) | | $ | 1 | | | $ | 6 | | | $ | 7 | |
| Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | 722 | | | | 123 | | | | 845 | | | | 90 | | | | 201 | | | | 291 | |
| Tax-exempt | | | 2 | | | | 38 | | | | 40 | | | | 73 | | | | (42 | ) | | | 31 | |
| Loans, net of allowance for loan | | | | | | | | | | | | | | | | | | | | | | | | |
| losses | | | 8,345 | | | | (12,420 | ) | | | (4,075 | ) | | | 6,137 | | | | 728 | | | | 6,865 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest income | | $ | 9,047 | | | $ | (12,268 | ) | | $ | (3,221 | ) | | $ | 6,301 | | | $ | 893 | | | $ | 7,194 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest paid on: | | | | | | | | | | | | | | | | | | | | | | | | |
| Money market and NOW accounts | | | 545 | | | | (7,319 | ) | | | (6,774 | ) | | | 1,984 | | | | 823 | | | | 2,807 | |
| Savings deposits | | | (62 | ) | | | (241 | ) | | | (303 | ) | | | 11 | | | | 115 | | | | 126 | |
| Time deposits | | | 423 | | | | (377 | ) | | | 46 | | | | (300 | ) | | | 215 | | | | (85 | ) |
| Total interest-bearing core deposits | | | 906 | | | | (7,937 | ) | | | (7,031 | ) | | | 1,695 | | | | 1,153 | | | | 2,848 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Time deposits - non-core | | | (395 | ) | | | (1,004 | ) | | | (1,399 | ) | | | (391 | ) | | | 234 | | | | (157 | ) |
| Federal funds purchased | | | 637 | | | | (598 | ) | | | 39 | | | | 128 | | | | 31 | | | | 159 | |
| FHLB borrowings | | | 3,897 | | | | (4,562 | ) | | | (665 | ) | | | 725 | | | | 252 | | | | 977 | |
| Trust preferred | | | - | | | | (10 | ) | | | (10 | ) | | | - | | | | (2 | ) | | | (2 | ) |
| Total interest-bearing alternative funding | | | 4,139 | | | | (6,174 | ) | | | (2,035 | ) | | | 462 | | | | 515 | | | | 977 | |
| Total interest expense | | $ | 5,045 | | | $ | (14,111 | ) | | $ | (9,066 | ) | | $ | 2,157 | | | $ | 1,668 | | | $ | 3,825 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 4,002 | | | $ | 1,843 | | | $ | 5,845 | | | $ | 4,144 | | | $ | (775 | ) | | $ | 3,369 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Management provides for possible loan losses by maintaining an allowance. The level of the allowance is determined based upon judgments regarding the size and nature of the loan portfolio, historical loss experience, the financial condition of borrowers, the level of nonperforming loans, and current general economic conditions. Additions to the allowance are charged to expense. Loans are charged against the allowance when management believes the collection of principal is unlikely.
The provision for loan losses totaled $3,600 in 2008, $725 in 2007, and $600 in 2006. The increase in the provision for 2008 when compared to 2007 was due to loan growth, moderate deterioration in credit quality, and an increase in unallocated reserves in light of significant economic uncertainty. The increase in the provision for 2007 when compared to 2006 was due to loan growth and some increased economic uncertainty.
At December 31, 2008, the Bank had $7,704 or 0.71% of total assets in nonperforming assets, net of government guarantees, compared to $4,094 or 0.43% of total assets at December 31, 2007. Nonperforming assets at December 31, 2008 consist of $3,898 of nonaccrual loans (net of $239 in government guarantees) and $3,806 of other real estate owned. Nonperforming assets do not include $2,234 of impaired loans less than 90 days past due and continuing to accrue interest as of December 31, 2008. At December 31, 2008, approximately $1,181 of the nonaccrual loans were consumer residential construction loans. Losses on these or any future nonperforming loans in the consumer residential construction segment of the loan portfolio are mitigated due to a cash-secured 20% principal guarantee for each of these loans. In
addition, no special allocation to the allowance for loan losses for these specific loans is expected. Other real estate owned consisted of 17 completed consumer construction residential properties and seven individual residential building lots.
The allowance for loan losses at December 31, 2008 was $10,980 (1.15% of outstanding loans, net of loans held for sale) compared to $8,675 (1.05% of loans) and $8,284 (1.08% of loans) at years end 2007 and 2006, respectively. At December 31, 2008, the Bank also has reserved $196 for possible losses on unfunded loan commitments, which is classified in other liabilities. The 2008 ending allowance includes $887 in specific allowance for $6,132 in impaired loans (net of government guarantees). At December 31, 2007, the Company had $3,671 of impaired loans (net of government guarantees) with a specific allowance assigned of $160.
Net loan charge offs were $1,295 in 2008 compared to $334 in 2007, and $108 in 2006. Net charge offs as a percentage of average loans were 0.15%, 0.04%, and 0.01% for 2008, 2007, and 2006, respectively.
Noninterest Income
Noninterest income is derived from sources other than fees and interest on earning assets. The Company’s primary sources of noninterest income are service charge fees on deposit accounts, merchant bankcard activity, income derived from mortgage banking services, and gains on the sale of loans.
2008 Compared to 2007
Noninterest income in 2008 was $4,269, up $344 or 9% from the $3,925 reported for the year 2007. The increase in 2008 noninterest income when compared to 2007 was primarily attributable to a $267 increase in service charges on deposit accounts and a $193 increase in other fee income, principally bankcard processing fee income. Service charges on deposit accounts increased due to lower earnings credit rate, which increased fees on analyzed business accounts. Bankcard processing fee income accounted for $114 of this increase. Increases in these categories were partially offset by a $15 decrease in mortgage banking income. The decline in mortgage banking income was attributable to a significant slow down in the residential housing market. The other income category in 2008 was $330, an $87 or 21% decrease from the $417 reported in the other income category for the year 2007. The decrease in the other income category was due to collection of approximately $70 in loan referral fees during the year 2007.
2007 Compared to 2006
Noninterest income in 2007 was $3,925, down $476 or 11% from the $4,401 reported for the year 2006. Excluding the one-time gain of $335 on the sale of property included in 2006 results, noninterest income in 2007 was down $141 or 3% from 2006. The following discussion excludes the effect of the gain on sale of property in 2006. The $141 decline in 2007 noninterest income when compared to 2006 was primarily due to a $435 decrease in mortgage banking income. The decline in mortgage banking income was attributable to a significant slow down in the residential housing market. The decline in mortgage banking income was partially offset by increases in service charges on deposit accounts, other fee income, principally bankcard processing fee income, and the other income category. Service charges on deposit accounts increased $76 or 6% due to lower earnings credit rate, which increased fees on analyzed business accounts. Other fee income, principally bankcard processing fee income in 2007 increased $135 or 9% over 2006. Bankcard processing fee income accounted for $53 of this increase, while other service charge income, primarily wire transfer fees accounted for $68 of this increase. The other income category in 2007 was $417, a $94 or 29% increase over the $323 reported in the other income category for the year 2006. The increase in the other income category was due to collection of approximately $70 in loan referral fees during the year 2007.
Noninterest Expense
Noninterest expense represents all expenses other than the provision for loan losses and interest costs associated with deposits and other interest-bearing liabilities. It incorporates personnel, premises and equipment, data processing and other operating expenses.
2008 Compared to 2007
Noninterest expense for the year 2008 was $29,562, up $3,701 or 14% over the $25,861 reported for the year 2007. Personnel expense in 2008 was up $2,422 and accounted for 65% of the total increase in noninterest expense in the year. Total salary expense was up $1,699 or 16% and benefits and taxes were up $780 or 16% over last year. Approximately $442 of the increase in salary expense was due to lower loan origination costs, which are a direct offset to salary expense. Higher benefits and taxes expense in 2008 resulted from increased group insurance, and accruals for officer incentives. The other expense category accounted for the majority of the remaining increase in noninterest expense in 2008 over 2007. Other expenses were $5,490 in 2008, up $588 or 12% over 2007 other expenses of $4,902. The increase in the other expense category can be attributed to the following areas: 1) increased FDIC assessment of $231; 2) increased travel expense of $89; 3) increased other real estate expense of $125 due to increases in other real estate owned; and 4) increased repossession and collection expense of $23 related to increases in non-performing loans.
2007 Compared to 2006
Noninterest expense for the year 2007 was $25,861, up $2,070 or 9% over the $23,791 reported for the year 2006. All noninterest expense categories showed an increase in 2007 when compared to 2006. Personnel expense in 2007 was up $1,089 and accounted for 53% of the total increase in noninterest expense in the year. Total salary expense was up $515 or 5% and benefits and taxes were up $823 or 20% over last year due to performance increases for existing employees, increased group insurance, and increased accruals for officer incentives. These increases were partially offset by a decline in commission expense in 2007 from 2006. The other expense category accounted for the majority of the remaining increase in noninterest expense in 2007 over 2006. Other expenses were $4,902 in 2007, up $708 or 17% over 2006 other expenses of $4,194. The increase in the other expense category can be attributed to the following areas: 1) increased FDIC assessment of $146; 2) increased communications expense (primarily armored car and courier services) of $133; 3) increased other data processing expense of $199 due to new contracts in place; 4) increased expense related to the unfunded loan commitment of $196; and 5) increased local taxes (Multnomah County and State of Washington B&O taxes) of $107.
BALANCE SHEET
Loans
At December 31, 2008, outstanding loans, net of deferred loan fees and excluding loans held for sale, were $956,357, up $134,035 over outstanding loans of $822,322 at December 31, 2007. A summary of loan growth by market for the year 2008 follows:
| | | Balance | | | Balance | | | $ Increase | | | % Increase | |
| | | Dec. 31, 2008 | | | Dec. 31, 2007 | | | (Decrease) | | | (Decrease) | |
| | | | | | | | | | | | | |
| Eugene Market | | $ | 237,604 | | | $ | 217,962 | | | $ | 19,642 | | | | 9.01 | % |
| | | | | | | | | | | | | | | | | |
| Portland Market | | | 432,961 | | | | 389,053 | | | | 43,908 | | | | 11.29 | % |
| | | | | | | | | | | | | | | | | |
| Seattle Market | | | 285,792 | | | | 215,307 | | | | 70,485 | | | | 32.74 | % |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 956,357 | | | $ | 822,322 | | | $ | 134,035 | | | | 16.30 | % |
| | | | | | | | | | | | | | | | | |
The Seattle market was primarily responsible for the majority of the growth in outstanding loans for the Company during 2008, but both the Portland and Eugene markets also showed solid year-over-year loan growth. The growth in all three markets can be attributed to increased commercial real estate lending and loans to dental professionals throughout the year, combined with a lessening of competition for loans. Throughout 2008, many financial institutions experiencing credit quality problems and significantly reduced their lending activities, thus increasing the opportunity for the Bank to grow its loan portfolio. More information on the loan portfolio can be found in statistical information in Item 1 and in Note 4 of the Notes to Consolidated Financial Statements in Item 8 below.
Goodwill and Intangible Assets
At December 31, 2008, the Company had a recorded balance of $22,031 in goodwill from the November 30, 2005 acquisition of NWB Financial Corporation and its wholly-owned subsidiary Northwest Business Bank (NWBF). In addition, at December 31, 2008 the Company had $873 core deposit intangible assets resulting from the acquisition of NWBF. The core deposit intangible was determined to have an expected life of approximately seven years and is being amortized over that period using the straight-line method. During 2008, the Company amortized $223 of the core deposit intangible. In accordance with Statement of Financial Accounting Standard (“SFAS”) 142, Goodwill and Other Intangible Assets, the Company does not amortize goodwill or other intangible assets with indefinite lives, but instead periodically tests these assets for impairment. Management performed an impairment analysis at December 31, 2008 and determined there was no impairment of the goodwill at the time of the analysis.
Deposits
Outstanding deposits at December 31, 2008 were $722,437, an increase of $78,013 over outstanding deposits of $644,424 at December 31, 2007. Core deposits, which are defined by the Company as demand, interest checking, money market, savings, and local time deposits, including local time deposits in excess of $100 thousand, were $615,832, down $60 from outstanding core deposits of $615,892 at December 31, 2007. At December 31, 2008 and 2007, respectively, core deposits represented 85% and 96% of total deposits, respectively. A summary of deposit growth by market for the year 2008 follows:
| | | Balance | | | Balance | | | $ Increase | | | % Increase | |
| | | Dec. 31, 2008 | | | Dec. 31, 2007 | | | (Decrease) | | | (Decrease | |
| | | | | | | | | | | | | |
| Eugene Market core deposits | | $ | 406,098 | | | $ | 405,351 | | | $ | 747 | | | | 0.18 | % |
| | | | | | | | | | | | | | | | | |
| Portland Market core deposits | | | 110,287 | | | | 109,698 | | | | 589 | | | | 0.54 | % |
| | | | | | | | | | | | | | | | | |
| Seattle Market core deposits | | | 99,447 | | | | 100,843 | | | | (1,396 | ) | | | -1.38 | % |
| | | | | | | | | | | | | | | | | |
| Total core deposits | | | 615,832 | | | | 615,892 | | | | (60 | ) | | | -0.01 | % |
| | | | | | | | | | | | | | | | | |
| Other deposits | | | 106,605 | | | | 28,532 | | | | 78,073 | | | | 273.63 | % |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 722,437 | | | $ | 644,424 | | | $ | 78,013 | | | | 12.11 | % |
| | | | | | | | | | | | | | | | | |
Outstanding core deposits at December 31, 2008 in all three markets were virtually flat from one year ago primarily due to the highly competitive environment for these deposits with other financial institutions in all three of the Bank’s primary markets. This increased competition for core deposits, primarily based on price, was driven by liquidity problems experienced by the entire industry during the last six months of 2008 as financial markets experienced significant disruption. In addition, core deposit growth was affected by a deterioration in economic conditions in all three markets that negatively impacted the cash flow, and thus the deposit levels of many of the Bank’s existing clients. As a result of no growth in core deposits, the Bank experienced growth of more than $78,000 in other deposits, which consisted primarily of brokered and public time deposits.
Junior Subordinated Debentures
The Company had $8,248 in junior subordinated debentures at December 31, 2008, which were issued in conjunction with the acquisition of NWBF. At December 31, 2008, the entire $8,248 in junior subordinated debentures had an interest rate of 6.265% that is fixed through November 2010. As of December 31, 2008, the entire balance of the junior subordinated debentures qualified as Tier 1 capital under regulatory capital purposes. Additional information regarding the terms of the junior subordinated debentures, including maturity/repricing dates and interest rate, is included in Note 12 of the Notes to Consolidated Financial Statements in Item 8 below.
CAPITAL RESOURCES
Capital is the stockholders’ investment in the Company. Capital grows through the retention of earnings and the issuance of new stock through the exercise of stock options. Capital formation allows the Company to grow assets and provides flexibility in times of adversity.
Stockholders’ equity at December 31, 2008 was $116,165, an increase of $8,656 or 8% from December 31, 2007. The increase in stockholders’ equity during 2008 was due to the retention of approximately $8,142 net income for the year and the exercise of stock options and the related tax benefit accounted for another $1,504.
The Federal Reserve Board and the FDIC have in place guidelines for risk-based capital requirements applicable to U.S. banks and bank holding companies. These risk-based capital guidelines take into consideration risk factors, as defined by regulation, associated with various categories of assets, both on and off-balance sheet. Under the guidelines, capital strength is measured in two tiers, which are used in conjunction with risk-adjusted assets to determine the risk-based capital ratios. These guidelines require a minimum of 8% total risk-based capital ratio, of which 4% must be Tier I capital. The regulations also specify that a 10% total risk-based capital ratio is required to be designated “well-capitalized” (the highest FDIC capital rating) by the FDIC. The Company’s Tier I capital, which consists of stockholders’ equity and qualifying trust preferred securities, less other comprehensive income, goodwill (net of the deferred tax associated with goodwill), and deposit-based intangibles, totaled $102,424 at December 31, 2008. Tier II capital components include all, or a portion of the allowance for loan losses and the portion of trust preferred securities in excess of Tier I statutory limits. The total of Tier I and Tier II capital components is referred to as Total Risk-Based Capital, and was $113,600 at December 31, 2008. The Bank’s total risk-based capital ratio was 11.11%, at December 31, 2008 compared to 10.97% at December 31, 2007.
Subsequent to year-end December 31, 2008, the Company raised approximately $9,700 of additional capital through a private equity placement of 750 thousand shares of stock at $13.50 per share. This additional capital is expected to increase the Company’s total risk-based capital ratio to more than 12% at the end of first quarter 2009. In addition, during December 2008, the Company was granted preliminary approval under TARP by the Treasury to receive $30 million of additional capital in the form of preferred stock. In January 2009, the Company announced it had determined not to participate in this program.
The Company pays cash dividends on a quarterly basis, typically in March, June, September and December of each year. The Board of Directors considers the dividend amount quarterly and takes a broad perspective in its dividend deliberations including a review of recent operating performance, capital levels, and concentrations of loans as a percentage of capital, and growth projections. The Board also considers dividend payout ratios, dividend yield, and other financial metrics in setting the quarterly dividend. The Company declared and paid cash dividends of $0.40 per share for the year 2008. That compares to dividends of $0.35 per share for the year 2007 when adjusted for the 10% stock dividend paid in June 2007.
The Board of Directors, at its February 17, 2009 meeting, approved a dividend of $0.10 per share for stockholders of record as of March 3, 2009. If continued for each quarter during 2009, this would result in no change in 2009 dividends over 2008 dividends.
The Company projects that earnings retention and existing capital will be sufficient to fund anticipated organic asset growth, while maintaining a well-capitalized designation from all regulatory agencies.
OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS
In the normal course of business, the Bank commits to extensions of credit and issues letters of credit. The Bank uses the same credit policies in making commitments to lend funds and conditional obligations as it does for other credit products. In the event of nonperformance by the customer, the Bank’s exposure to credit loss is represented by the contractual amount of the instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the contract. Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At December 31, 2008, the Bank had $182,609 in commitments to extend credit.
Letters of credit written are conditional commitments issued by the Bank to guarantee performance of a customer to a third party. The credit risk involved is essentially the same as that involved in extending loan facilities to customers. At December 31, 2008, the Bank had $2,298 in letters of credit and financial guarantees written.
The Bank also has internal guidance lines of credit established for certain borrowers, primarily in the residential construction industry. These guidance lines are not contractual commitments to extend credit, and may be terminated by the Bank for any reason without any obligation to the borrower. These lines provide the Bank’s lenders limits on future extensions of credit to certain borrowers. The Bank uses the same credit policies in establishing internal guidance lines as it does for other credit products. At December 31, 2008, the Bank had established unused and uncommitted guidance lines totaling approximately $1,387 compared to unused and uncommitted guidance lines of $38,321 at December 31, 2007.
The Company has certain other financial commitments. These future financial commitments are outlined below:
| Contractual Obligations | | | | | | | | | | | | | | | |
| (dollars in thousands) | | Total | | | Less than One Year | | | 1 - 3 Years | | | 3 - 5 Years | | | More than 5 Years | |
| | | | | | | | | | | | | | | | |
| Junior subordinated debenture | | $ | 8,248 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8,248 | |
| FHLB borrowings | | | 194,500 | | | | 159,500 | | | | 21,500 | | | | 11,500 | | | | 2,000 | |
| Federal Reserve borrowings | | | 20,000 | | | | 20,000 | | | | - | | | | - | | | | - | |
| Time Deposits | | | 150,545 | | | | 123,172 | | | | 21,482 | | | | 5,891 | | | | - | |
| Operating lease obligations | | | 6,848 | | | | 954 | | | | 1,177 | | | | 932 | | | | 3,785 | |
| | | $ | 380,141 | | | $ | 303,626 | | | $ | 44,159 | | | $ | 18,323 | | | $ | 14,033 | |
| | | | | | | | | | | | | | | | | | | | | |
LIQUIDITY
Liquidity is the term used to define the Company’s ability to meet its financial commitments. The Company maintains sufficient liquidity to ensure funds are available for both lending needs and the withdrawal of deposit funds. The Company derives liquidity through core deposit growth, maturity of investment securities, and loan payments. Core deposits include demand, interest checking, money market, savings, and local time deposits, including local time deposits in excess of $100. Additional liquidity and funding sources are provided through the sale of loans, sales of securities, access to national CD markets, and both secured and unsecured borrowings.
The Company uses a number of measurements to monitor its liquidity position on a daily, weekly, and monthly basis. During the third and fourth quarters of 2008 during significant disruption of financial markets that created liquidity problems for a number of financial institutions, the Company heightened its
liquidity monitoring and also put into place a number of programs to increase its core deposit base, including deposit promotions in all three markets.
Core deposits at December 31, 2008 were 85% of total deposits compared to 96% at December 31, 2007. Core deposits at December 31, 2008 were virtually flat with one year ago due to increased competition for core deposits by all financial institutions, combined with deteriorating economic conditions. Loan growth was funded primarily through alternative funding sources, including overnight borrowed funds, Federal Home Loan Bank advances, Federal Reserve Bank of San Francisco advances, public deposits available from the State of Oregon and State of Washington, national market time deposits, and brokered time deposits.
The Company has deposit relationships with several large clients, which are closely monitored by Bank officers. At December 31, 2008, 29 large deposit relationships with the Bank account for $206,026 or 29% of total deposits. The single largest client represented 8% of total deposits at December 31, 2008. The loss of this deposit relationship or other large deposit relationships could cause an adverse effect on short-term liquidity. The Company expects to maintain these relationships and believes it has sufficient sources of liquidity to mitigate the loss of one or more of these clients.
Borrowing lines have been established at various correspondent banks, the Federal Home Loan Bank of Seattle and with the Federal Reserve Bank of San Francisco. At December 31, 2008, the Bank had secured and unsecured borrowing lines totaling approximately $495,188 consisting of $327,253 with the Federal Home Loan Bank of Seattle, $118,000 with various correspondent banks, and $49,935 with the Federal Reserve Bank of San Francisco. The Federal Home Loan Bank borrowing line is limited to the amount of collateral pledged. At December 31, 2008, the Bank had collateral pledged to the FHLB in the form of commercial real estate loans, first and second lien single family residential loans, multi-family loans, and mortgage-backed securities that had a discounted collateral value of approximately $273,978 for this line. The $49,935 borrowing line with the Federal Reserve Bank of San Francisco is also secured through the pledging of commercial loans under the Bank’s Borrower-In-Custody program. The $118,000 in borrowing lines with correspondent banks is unsecured. At December 31, 2008, the Bank had $194,500 in borrowings outstanding from the FHLB of Seattle and $24,000 outstanding on its overnight correspondent bank lines, and $20,000 outstanding with the Federal Reserve Bank of San Francisco. In addition, the Bank is part of the State of Oregon and State of Washington community bank time deposit program and at December 31, 2008 had approximately $500 available from these sources. The Bank’s loan portfolio also contains approximately $31,689 in guaranteed government loans, which can be sold on the secondary market.
Subsequent to the end of the year, as a result of a financial institution failure in the State of Washington, the Bank was assessed $9 thousand for uninsured public deposits at the failed institution. The assessment was based upon the Bank’s pro rata share of public deposits as of December 31, 2008, which amounted to less than one-tenth of one percent. However, due to the increased risk of future bank failures in Washington, the Bank chose to exit the public deposit pool in order to minimize its exposure to possible assessments for uninsured deposits. The Bank will continue to have a potential liability for uninsured deposits for a period of one year following its exit from the state public deposit pool.
INFLATION
Substantially all of the assets and liabilities of the Company are monetary. Therefore, inflation has a less significant impact on the Company than does fluctuation in market interest rates. Inflation can lead to accelerated growth in noninterest expenses, which impacts net earnings. During the last two years, inflation, as measured by the Consumer Price Index, has not changed significantly. The effects of this inflation have not had a material impact on the Company.
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934. Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and timely reported as provided in the SEC rules and forms. As a result of this evaluation, there were no significant changes in our internal control over financial reporting during the three months ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system has been designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of the Company’s published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The management of Pacific Continental Corporation has assessed the effectiveness of its internal control over financial reporting at December 31, 2008. To make this assessment, the Company used the criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Company concluded that the internal control system over financial reporting is effective as of December 31, 2008.
The Company’s independent auditors, Moss Adams, L.L.P., have issued an attestation report on the Company’s internal control over financial reporting. The attestation report can be found on pages 35 and 36 of this document.
(a)(1) See Index to Consolidated Financial Statements filed under item 8 of this report.
All other schedules to the financial statements required by Regulation S-X are omitted because they are not applicable, not material, or because the information is included in the financial statements or related notes.
(a)(2) Exhibit Index
Exhibit
3.1 Amended Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (2)
10.1 1999 Employee Stock Option Plan (3)
10.2 1999 Director’s Stock Option Plan (3)
10.3 2006 Stock Option and Equity Compensation Plan (4)
10.4 Form of Restricted Stock Award Agreement (4)
10.5 Form of Stock Option Award Agreement (4)
10.6 Form of Restricted Stock Unit Agreement (4)
10.7 Form of Stock Appreciation Rights Agreement (4)
10.8 Change of Control/Salary Continuation Agreement for Michael Reynolds (5)
10.9 Change of Control/Salary Continuation Agreement for Daniel Hempy (5)
10.10 Change of Control/Salary Continuation Agreement for Basant Singh (6)
10.11 Executive Employment Agreement for Roger Busse (7)
10.12 Executive Employment Agreement for Hal Brown (7)
10.13 NWB Financial Corporation Employee Stock Option Plan (8)
10.14 NWB Financial Corporation Director Stock Option Plan (8)
| 10.15 | Director Fee Schedule, Effective January 1, 2009 * |
| 10.16 | Director Stock Trading Plan (7) |
| | 10.17 | Form of Common Stock Purchase Agreement between the Company and each of the Purchasers, dated as of January 6, 2009 (9) |
| | 10.18 | Form of Registration Rights Agreement between the Company and each of the Purchasers, dated as of January 6, 2009 (9) |
14 Code of Ethics for Senior Financial Officers and Principal Executive Officer (7)
23.1 Accountants Consent of Moss Adams L.L.P.
31.1 302 Certification, Hal Brown, President and Chief Executive Officer
| | 31.2 | 302 Certification, Michael A. Reynolds, Executive Vice President and Chief Financial Officer |
32 Certifications Pursuant to 18 U.S.C. Section 1350
| (1) | Incorporated by reference to Exhibit 3 of the Company’s Quarterly Report on 10-Q for the Quarter ended June 30, 2007. |
| (2) | Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2008. |
| (3) | Incorporated by reference to Exhibits 99.1 - 99.4 of the Company’s S-8 Registration Statement (File No. 333-109501). |
| (4) | Incorporated by reference to Exhibits 99.1 - 99.5 of the Company’s S-8 Registration Statement (File No. 333-134702). |
| (5) | Incorporated by reference to Exhibits 10.1 and 10.2 of the Company’s Quarterly Report on 10-Q for the Quarter ended March 31, 2005. |
| (6) | Incorporated by reference to Exhibit 10.10 of the Registration Statement on Form S-4 (File No. 333-128968). |
| (7) | Incorporated by reference to Exhibits 10.11, 10.12, 10.16 and 14 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. |
| (8) | Incorporated by reference to Exhibits 99.1 and 99.2 of the Company’s S-8 Registration Statement (File No. 333-130886). |
| (9) | Incorporated by reference to Exhibits 10.1 and 10.2 of the Company’s Current Report on Form 8-K filed January 8, 2009. |
(a)(3) | Financial Statement Schedules |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to this report to be signed on its behalf by the undersigned on March 30, 2009.
PACIFIC CONTINENTAL CORPORATION
(Company)
By: /s/ Hal M. Brown
Hal Brown
Chief Executive Officer
CERTIFICATION
I, Hal Brown, certify that:
| 1. | I have reviewed this Amendment No. 1 to the Form 10-K of Pacific Continental 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(s) 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 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 designed 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; and |
| 5. | The registrant's other certifying officer(s) 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 the 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 30, 2009 | /s/ Hal Brown |
| | Hal Brown, Chief Executive Officer |
CERTIFICATION
I, Michael A. Reynolds, certify that:
| 1. | I have reviewed this Amendment No. 1 to the Form 10-K of Pacific Continental 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(s) 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 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 designed 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; and |
| 5. | The registrant's other certifying officer(s) 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 the 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 30, 2009 /s/ Michael A. Reynolds
Michael A. Reynolds, Executive Vice President & CFO
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 1 to the Annual Report of Pacific Continental Corporation (the “Company”) on Form 10-K for the period ending December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Hal M. Brown, Chief Executive Officer, and Michael A. Reynolds, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Hal M. Brown | /s/ Michael A. Reynolds |
| Hal M. Brown | Michael A. Reynolds |
| Chief Executive Officer | Chief Financial Officer |
Dated: March 30, 2009
