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PCBK > SEC Filings for PCBK > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for PACIFIC CONTINENTAL CORP


7-May-2013

Quarterly Report


ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

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 financial statements and the notes included later in this report. Please refer also to our Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in the Company's 2012 Form 10-K. All dollar amounts, except share and per share data, are expressed in thousands of dollars.

In addition to historical information, this report contains 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 regarding projected results for 2013, the expected interest rate environment, 2013 provision for loan losses, 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, and our other reports filed with the SEC:

Local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets.

The local housing or real estate market could continue to decline.

The risks presented by an economic recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations, and loan portfolio delinquency rates.

Our concentration in loans to dental professionals exposes us to the risks affecting dental practices in general.

Interest rate changes could significantly reduce net interest income and negatively affect funding sources.

Projected business increases following any future strategic expansion or opening of new branches could be lower than expected.

Competition among financial institutions could increase significantly.

The goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital.

The reputation of the financial services industry could deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers.

The efficiencies we may expect to receive from any investments in personnel, acquisitions, and infrastructure may not be realized.

The level of nonperforming assets and charge-offs or changes in the estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements may increase.

Changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, executive compensation, and insurance) could have a material adverse effect on our business, financial condition and results of operations.

Acts of war or terrorism, or natural disasters, such as the effects of pandemic flu, may adversely impact our business.

The timely development and acceptance of new banking products and services and perceived overall value of these products and services by users may adversely impact our ability to increase market share and control expenses.

Changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters may impact the results of our operations.

The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews may adversely impact our ability to increase market share and control expenses.


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Our success at managing the risks involved in the foregoing items will have a significant impact on our results of operations and future prospects.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Part I, Item 1A "Risk Factors" in the company's 2012 form 10-K and Part II, Item 1A"Risk Factors" in this report and the other risk described in this report and include risks and uncertainties described or referred to in Part I, Item 1 "Business" under the captions "Competition" and "Supervision and Regulation" of the Company's 2012 Form 10-K and Part II Item 2 "Management Discussion and Analysis of Financial Condition and results of Operations" of this report. 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 whether as a result of new information, future events or otherwise.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

We follow accounting standards set by the Financial Accounting Standards Board, commonly referred to as the "FASB." The FASB sets generally accepted accounting principles ("GAAP") that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in this report are to the "FASB Accounting Standards Codification," sometimes referred to as the "Codification" or "ASC." The FASB finalized the Codification effective for periods ending on or after September 15, 2009. Prior FASB Statements, Interpretations, Positions, EITF consensuses, and AICPA Statements of Position are no longer being issued by the FASB. The Codification does not change how the Company accounts for its transactions or the nature of related disclosures made. However, when referring to guidance issued by the FASB, the Company refers to topics in the ASC rather than the specific FASB statement. We have updated references to GAAP in this report to reflect the guidance in the Codification.

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 in the Company's 2012 Form 10-K. Management believes that the following policies and those disclosed in the Notes to Consolidated Financial Statements in the Company's 2012 Form 10-K should be considered critical under the SEC definition:

Nonaccrual Loans

Accrual of interest is discontinued on contractually delinquent loans when management believes that, after considering economic and business conditions and collection efforts, the borrower's financial condition is such that collection of principal or interest is doubtful. At a minimum, loans that are past due as to maturity or payment of principal or interest by 90 days or more are placed on nonaccrual status, unless such loans are well-secured and in the process of collection. Interest income is subsequently recognized only to the extent cash payments are received satisfying all delinquent principal and interest amounts, and the prospects for future payments in accordance with the loan agreement appear relatively certain. In accordance with GAAP, payments received on nonaccrual loans are applied to the principal balance and no interest income is recognized.

Allowance for Loan Losses and Reserve for Unfunded Commitments

The allowance for loan losses on 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.


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Troubled Debt Restructurings

In the normal course of business, the Company may modify the terms of certain loans, attempting to protect as much of its investment as possible. Management evaluates the circumstances surrounding each modification to determine whether it is a troubled debt restructuring ("TDR"). TDRs exist when 1) the restructuring constitutes a concession, and 2) the debtor is experiencing financial difficulties. Additional information regarding the Company's TDRs can be found in Note 4 of the March 31, 2013, Notes to Consolidated Financial Statements in Item 1 of this report.

Goodwill and Intangible Assets

At March 31, 2013, the Company had $23,770 in goodwill and other intangible assets. In accordance with financial accounting standards, assets with indefinite lives are no longer amortized, but instead are periodically tested for impairment. Management performs an impairment analysis of its goodwill and intangible assets with indefinite lives at least annually and has determined that there was no impairment as of December 31, 2012.

Share-based Compensation

Consistent with the provisions of FASB ASC 718, Stock Compensation, a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation, we recognize expense for the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees' requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions. The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. Management assumptions utilized at the time of grant impact the fair value of the option calculated under the Black-Scholes methodology, and ultimately, the expense that will be recognized over the life of the option. Additional information is included in Note 1 of the December 31, 2012 Notes to Consolidated Financial Statements in Item 8 of the Company's 2012 Form 10-K.

Fair Value Measurements

Generally accepted accounting principles define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820, "Fair Value Measurements," establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources while unobservable inputs reflect our estimates about market data. In general, fair values determined by Level 1 inputs utilize quoted prices for identical assets or liabilities traded in active markets that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Recent Accounting Pronouncements

In April 2012, the FASB issued Accounting Standards Update No. 2012-02, "Receivables: A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring." This Update provides additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether the debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2012, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of this Accounting Standards Update did not have a material impact on the Company's consolidated financial statements. The Company did, however, expand Note 4 to include additional disclosures regarding TDRs.


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In May 2012, the FASB issued Accounting Standards Update No. 2012-04, "Fair Value Measurements." This Update provides guidance that develops common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs). The amendments in this Update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this Update should be applied prospectively and are effect during interim and annual periods beginning after December 15, 2012. The adoption of this Accounting Standards Update did not have a material impact on the Company's consolidated financial statements.

In June 2012, the FASB issued Accounting Standards Update No. 2012-05, "Presentation of Comprehensive Income." This Update requires that an entity elect to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this Update should be applied retrospectively and are effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this Accounting Standards Update did not have a material impact on the Company's consolidated financial statements.

In September 2012, the FASB issued Accounting Standards Update No. 2012-08, "Intangibles-Goodwill and Other: Testing Goodwill for Impairment." This Update simplifies how entities test goodwill for impairment. The amendments of this Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2012. Early adoption is permitted. The adoption of this Accounting Standard Update is not expected to have a material impact on the Company's consolidated financial statements.

In December 2012, the FASB issued Accounting Standards Update No. 2012-12, "Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2012-05." The amendments of this Update supersede changes to those paragraphs in Update 2012-05 that pertain to how, when, and where reclassification adjustments are presented. The amendments of this Update are effective at the same time as the amendments in Update 2012-05 so that entities will not be required to comply with the presentation requirements in Update 2012-05 that this Update is deferring. The amendments in this Update should be applied retrospectively and are effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this Accounting Standard Update did not have a material impact on the Company's consolidated financial statements.


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HIGHLIGHTS FOR FIRST QUARTER

                                                      For the three months ended March 31,
                                                   2013                 2012             % Change
Net income                                    $        2,450         $     2,716              -9.8 %
Operating revenue (1)                                 14,405         $    14,065               2.4 %
Earnings per share
Basic                                         $         0.14         $      0.15              -6.7 %
Diluted                                       $         0.14         $      0.15              -6.7 %
Assets, period-end                            $    1,443,658         $ 1,289,793
Loans, period-end (2)                         $      950,083         $   824,860
Core deposits, period end (3)                 $      960,743         $   858,929
Deposits, period-end                          $    1,067,695         $   954,647
Return on average assets (4)                            0.70 %              0.85 %
Return on average equity (4)                            5.43 %              6.07 %
Return on average tangible equity (4) (5)               6.21 %              6.93 %

(1) Operating revenue is defined as net interest income plus noninterest income.

(2) Net of deferred fees; excludes allowance for loan losses.

(3) Defined by the Company as demand, interest checking, money market, savings, and local nonpublic time deposits, including local nonpublic time deposits in excess of $100.

(4) Amounts annualized.

(5) Tangible equity excludes goodwill and core deposit intangibles related to acquisitions.

On February 1, 2013, the Company successfully completed the acquisition of Century Bank. A summary of the assets and liabilities acquired through this transaction is provided in Note 2, Business Combinations of this quarterly report. During the weekend of April 5, 2013, the Company successfully converted the Century Bank loan and deposit systems to the Company's core operating system.

The Company earned $2,450 in first quarter 2013, compared to $2,716 in first quarter 2012. The decline in net income was primarily due to $1,246 of pre-tax merger expenses related to the Century Bank transaction, which lowered first quarter 2013 earnings by approximately $835, or $.05 per diluted share.

During first quarter 2013, the Company continued to experience organic growth in outstanding loans. Outstanding loans at March 31, 2013, were $950,083, up $79,667 over December 31, 2012, outstanding loans. Loans acquired in the Century Bank transaction accounted for $62,605 of first quarter 2013 loan growth, and organic loan growth was $16,966 during the quarter. Outstanding core deposits at March 31, 2013, were $960,743, up $22,114 from December 31, 2012. Core deposits at March 31, 2013, included $64,782 of Century Bank core deposits. Organic core deposits at March 31, 2013, were $895,961, down $42,668 from December 31, 2012, levels, which is a typical seasonal pattern during the first quarter.

Period-end assets at March 31, 2013, were $1,443,658, up $153,865, or 12 percent, over March 31, 2012. Approximately $65,000 of that increase was attributable to the Century Bank acquisition. Core deposits at March 31, 2013, were $960,743, up $101,813, or 12 percent, from one year ago, and up $22,114 from December 31, 2012. Year-to-date March 31, 2013, average core deposits were $943,315, an increase of $73,218 from the same period one year ago. Year-to-date average assets at March 31, 2013, were $1,411,988, up $127,361 from last year due to growth in average loans and average securities-available-for-sale.

Reconciliation of non-GAAP financial information

Management utilizes certain non-GAAP financial measures to monitor the Company's performance. While we believe the presentation of non-GAAP financial measures provides additional insight into our operating performance, readers of this report are urged to review the GAAP results as presented in the Financial Statements in Item 1 of this report.


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The Company presents a computation of tangible equity along with tangible book value and return on average tangible equity. The Company defines tangible equity as total shareholders' equity before goodwill and core deposit intangible assets. Tangible book value is calculated as tangible equity divided by total shares outstanding. Return on average tangible equity is calculated as net income divided by average tangible equity. We believe that tangible equity and certain tangible equity ratios are meaningful measures of capital adequacy which may be used when making period-to-period and company-to-company comparisons. Tangible equity and tangible equity ratios are considered to be non-GAAP financial measures and should be viewed in conjunction with total shareholders' equity, book value and return on average equity. The following table presents a reconciliation of total shareholders' equity to tangible equity.

                                                 March 31,          December 31,         March 31,
                                                    2013                2012                2012
Total shareholders' equity                       $  182,458        $      183,381        $  179,560
Subtract:
Goodwill                                            (22,945 )             (22,031 )         (22,031 )
Core deposit intangible assets                         (825 )                 -                (148 )

Tangible shareholders' equity (non-GAAP)         $  158,688        $      161,350        $  157,381

Book value per share                             $    10.23        $        10.28        $     9.87
Tangible book value per share (non-GAAP)         $     8.90        $         9.05        $     8.65
Return on average equity                               5.43 %                6.97 %            6.07 %
Return on average tangible equity (non-GAAP)           6.21 %                7.94 %            6.93 %

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the primary source of the Company's revenue. Net interest income is the difference between interest income derived from earning assets, principally loans, and 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.

The net interest margin for first quarter 2013 was 4.29 percent, an increase of 18 basis points over the fourth quarter 2012 margin of 4.11 percent, but down 10 basis points from the 4.39 percent reported for first quarter 2012.

This represents the first linked quarter increase in the net interest margin in the last three years. The increase in the margin is attributable to three factors 1) the accretion of $231 of the Century Bank fair value credit mark into interest income, 2) a reduction in the amortization of premiums paid on mortgage-backed securities due to lower levels of refinancing activity and 3) an improvement in the asset mix as average loans increased to 65 percent of total average assets. While the accretion on the Century Bank portfolio should continue for the next few years, the Company does not anticipate that the quarterly accretion will continue at levels experienced during first quarter 2013.

The Company's earning asset yields increased by 15 basis points from 4.53 percent in fourth quarter 2012 to 4.68 percent in first quarter 2013. Both the securities portfolio and the loan portfolio experienced increases in the yields on a linked quarter basis. The yield on the loan portfolio for first quarter 2013 was 5.72 percent, down 4 basis points from fourth quarter 2012, while the yield on the securities portfolio increased to 2.26 percent, from the 2.02 percent reported for fourth quarter 2012. The decline in the yield on loans was partially offset by the accretion of the Century Bank fair value marks.


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The Company continued to lower its cost of funds as the cost of interest-bearing liabilities fell by 5 basis points from fourth quarter 2012 to first quarter 2013. The cost of both interest-bearing core deposits and wholesale funding declined in first quarter 2013 when compared to the prior quarter by 5 and 3 . . .

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