Add
PMBC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| PMBC > SEC Filings for PMBC > Form 10-K on 17-Mar-2009 | All Recent SEC Filings |
17-Mar-2009
Annual Report
Overview
Forward Looking Statements
The following discussion contains statements (which are commonly referred to as
"forward looking statements") which discuss our beliefs or expectations about
(i) operating trends in our markets and in economic conditions more generally,
and (ii) our future financial performance and future financial condition. The
consequences of those operating trends on our business and the realization of
our expected future financial results, which are discussed in those forward
looking statements, are subject to the uncertainties and risks that are
described above in Item 1A of this Report under the caption "RISK FACTORS." Due
to those uncertainties and risks and the uncertainties with respect to the
duration and effects of those operating trends on our business, our future
financial performance may differ, possibly significantly, from the performance
that is currently expected as set forth in the forward looking statements. As a
result, you should not place undue reliance on those forward looking statements.
We disclaim any obligation to update or revise any of the forward looking
statements, whether as a result of new information, future events or otherwise.
Background
The following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Report.
Our principal operating subsidiary is Pacific Mercantile Bank (the "Bank"), which is a California state chartered bank and a member of the Federal Reserve System. The Bank accounts for substantially all of our consolidated revenues and income. Accordingly, the following discussion focuses primarily on the Bank's operations and financial condition.
Overview of Fiscal 2008 Operating Results
The following table sets forth information comparing our results of operations
for the fiscal year ended December 31, 2008 to our results of operations in the
years ended December 31, 2007 and 2006.
Year Ended December 31.
2008 2007 2006
Percent Percent
Amount Change Amount Change Amount
(Dollars in thousands, except per share data)
Interest income $ 61,611 (12.1 )% $ 70,058 9.8 % $ 63,800
Interest expense 34,498 (10.7 )% 38,617 22.9 % 31,418
Net interest income 27,113 (13.8 )% 31,441 (2.9 )% 32,382
Provision for loan losses 21,685 970.9 % 2,025 83.3 % 1,105
Noninterest income 2,606 55.8 % 1,673 32.2 % 1,266
Noninterest expense 23,702 9.1 % 21,718 5.0 % 20,683
Income (loss) before income taxes (15,668 ) (267.2 )% 9,371 (21.0 )% 11,860
Income tax expense (benefit) (3,702 ) (202.8 )% 3,601 (24.0 )% 4,739
Income (loss) from continuing
operations(1) (11,966 ) (307.4 )% 5,770 (19.0 )% 7,121
Loss from discontinued
operations(1) - - - 100.0 % (189 )
Net income (loss) (11,966 ) (307.4 )% 5,770 (16.8 )% 6,932
Per share data -diluted
Income (loss) from continuing
operations $ (1.14 ) (315.1 )% $ 0.53 (19.7 )% $ 0.66
Loss from discontinued operations - - - 100.0 % (0.02 )
Net income (loss) per
share-diluted (1.14 ) (315.1 )% 0.53 (17.2 )% 0.64
Weighted average number of
diluted shares 10,473,476 (3.5 )% 10,855,160 0.2 % 10,829,775
|
(1) Net of taxes.
As the above table indicates, in 2008 we incurred a net loss of $12 million as
compared to net income of $5.8 million in 2007, due to a number of factors, the
most important of which was the worsening of the economic recession which led to
(i) significant increases in defaults by borrowers of their loans, which
required us to recognize losses on those loans and to significantly increase our
allowance for loan losses and (ii) a decrease in our net interest income.
The following provides an overview of the more significant changes in our operating results in fiscal 2008, which are discussed in greater detail in the discussion that follows this overview.
• Increase in Loan Losses and in the Provision for Loan Losses. The adverse effects of the worsening economic recession are reflected in the provisions that we made for loan losses in fiscal 2008. During 2008, we made provisions for loan losses totaling almost $21.7 million, as compared to approximately $2.0 million for fiscal 2007, in order to (i) to provide for loan charge-offs and write-downs totaling $12.4 million, and (ii) to increase the allowance for loan losses (after giving effect to those loan charge-offs and write-downs), to approximately $15.5 million at December 31, 2008. The increase in loan write-downs and our decision to significantly increase our loan loss reserves were primarily attributable to a substantial increase in loan defaults by borrowers who were adversely affected by the worsening economic recession and uncertainties as to its continued duration and future severity.
• Decrease in Net Interest Income. Net interest income decreased by $4.3 million, or 14%, in fiscal 2008, despite an increase in lending, primarily as a result of an $8.5 million, or 12%, decrease in interest income that was primarily attributable to a reduction in prevailing market rates of interest resulting from interest rate reductions implemented by the Federal Reserve Board to stimulate the economy and spur borrowings by businesses and consumers. Due to those Federal Reserve Board actions, the prime rate of interest, which is the rate we charge on a large portion of the loans we make, decreased by 400 basis points from the beginning to the end of 2008. Those Federal Reserve Board interest rate reductions also enabled us to reduce the interest rates we paid on deposits and other interest-bearing liabilities, which led to a $4 million, or 11%, decrease in interest expense that partially offset the reduction in interest income in 2008.
• Increase in Noninterest Expense. Noninterest expense increased by
$2 million, or 9%, in fiscal 2008, as compared to fiscal 2007, due
primarily to (i) a $1.4 million increase in 2008 in expenses incurred in
connection with real properties acquired from borrowers on or in lieu of
foreclosures (commonly referred to as "real estate owned" or "REO"), and
(ii) an $860,000 increase of salaries and employee benefits due
principally to the addition of loan officers. Partially offsetting these
increases was a $420,000 decrease in amortization of debt issuance costs.
• Income Tax Benefit. Our net loss reflects the recognition of an income tax benefit of $3.7 million for 2008, net of a valuation allowance of $3.0 million. This income tax benefit was primarily attributable to the loss incurred in 2008 and an increase in deferred tax benefits, consisting principally of tax credit carryforwards and income tax deductions.
Set forth below are certain key financial performance ratios and other financial data from continuing operations for the periods indicated:
Year Ended December 31,
2008 2007 2006
Return on average assets (1.06 )% 0.53 % 0.70 %
Return on average shareholders' equity (12.37 )% 6.25 % 8.52 %
Ratio of average equity to average assets 8.59 % 8.47 % 8.26 %
Net interest margin(1) 2.47 % 2.96 % 3.30 %
|
(1) Net interest income expressed as a percentage of total average interest earning assets.
Changes in Financial Condition
To reduce our exposure to the deteriorating conditions in the real estate market, we have been reducing the volume of single family residential and real estate construction loans since the fourth quarter of 2007, while increasing the volume of commercial and business loans. As a result, as of December 31, 2008, single family residential and real estate construction loans accounted for 11.6% of the loans in our loan portfolio, as compared to 14.4% at December 31, 2007.
We believe that these reductions in the volume of real estate related loans, together with our actions in charging off non-performing loans and significantly increasing the allowance for loan losses , have improved the quality of our loan portfolio and, at the same time, has enhanced our ability to absorb additional loan losses that may occur as a result of the continuing economic recession.
The net loss in 2008 reduced shareholders equity by $12.0 million to $84.2 million and our tangible book value per share to $8.08 at December 31, 2008 from $96.9 million and $9.36, respectively, at December 31, 2007. However, notwithstanding the net loss in 2008 and the resulting decrease in shareholders equity, the ratio of our total capital-to-risk weighted assets, which is the principal federal regulatory measure of the financial strength of banking institutions, was 12.1%. As a result, we continued to be classified, under bank regulatory guidelines, as a "well-capitalized" banking institution, which is the highest of the capital standards established under federal banking regulations.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and general practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make estimates and assumptions regarding circumstances or trends that could affect the value of those assets, such as economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates and assumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances. If changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, or other unanticipated events were to occur that might affect our operations, we may be required under GAAP to adjust our earlier estimates and to reduce the carrying values of the affected assets on our balance sheet, generally by means of charges against income.
Our critical accounting policies relate to the determination of our allowance for loan losses, the fair value of securities available for sale and the realizability, and hence the valuation, of our deferred tax asset.
Allowance for Loan Losses. The accounting policies and practices we follow in determining the sufficiency of the allowance we establish for possible loan losses require us to make judgments and assumptions about economic and market
conditions and trends that can affect the ability of our borrowers to meet their loan payment obligations to us. Accordingly, we use historical loss factors, adjusted for current economic and market conditions, other economic indicators and applicable bank regulatory guidelines, to determine the losses inherent in our loan portfolio and the sufficiency of our allowance for loan losses. If unanticipated changes were to occur in those conditions or trends, or the financial condition of borrowers were to deteriorate, or there were changes to these loss factors or regulatory guidelines, actual loan losses could be greater than those that had previously been predicted. In such an event, it could become necessary for us to increase the allowance for loan losses by means of a charge to income referred to in our financial statements as the "provision for loan losses." Such an increase would reduce the carrying value of the loans on our balance sheet, and the additional provision for loan losses taken to increase that allowance would reduce our income in the period when it is determined that an increase in the allowance for loan losses is necessary. During the fourth quarter of 2008, federal bank regulatory agencies adopted new and more stringent guidelines and methodologies for identifying losses in bank loan portfolios and determining the sufficiency of loan loss reserves, due to the worsening of the economic recession and the prospects that conditions would not improve during 2009. We applied those new guidelines and methodologies beginning in the fourth quarter of 2008 and we will continue applying them in 2009. See the discussion in the subsections entitled "-Provision for Loan Losses" and "-Allowance for Loan Losses and Nonperforming Loans" below.
Fair Value of Securities Available for Sale. We determine the fair value of our investment securities by obtaining quotes from third party vendors and securities brokers. When quotes are not available, a reasonable fair value is determined by using a variety of industry standard pricing methodologies including, but not limited to, discounted cash flow analysis, matrix pricing, option adjusted spread models, as well as fundamental analysis. These pricing methodologies require us to make various assumptions relating to such matters as future prepayment speeds, yield, duration, monetary policy and demand and supply for the individual securities. Consequently, if changes were to occur in the market or other conditions on which those assumptions were based, it could become necessary for us to reduce the fair values of our securities, which would result in changes to accumulated other comprehensive income/(loss) on our balance sheet. If the Company determines reductions in the fair values of any securities are other than temporary, it will be necessary for the Company to take an impairment loss directly to our income statement.
Utilization and Valuation of Deferred Income Tax Benefits. We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits. We evaluate our deferred tax assets for recoverability using a consistent approach that considers the relative impact of negative and positive evidence, including our historical profitability and projections of future taxable income. We are required to establish a valuation allowance for deferred tax assets and record a charge to income or stockholders' equity if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management-approved business plans and ongoing tax planning strategies. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between our projected operating performance, our actual results and other factors. Accordingly, we have included the assessment of a deferred tax asset valuation allowance as a critical accounting policy.
Our deferred tax assets increased to $6.6 million at December 31, 2008, net of a non-cash charge of $3.0 million that we recorded to establish a partial deferred tax asset valuation allowance.
Discontinued Business
In the second quarter 2006, the Bank sold PMB Securities Corp, our retail securities brokerage business, which had been operated as a wholly-owned subsidiary of the Bancorp. In accordance with Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the operating results of the retail securities brokerage business has been classified as discontinued operations and prior period financial statements were restated on that same basis. See "Selected Financial Data" and our consolidated financial statements contained in Item 8 of this Report.
Additionally, as a result of the sale of the securities brokerage business, our commercial banking business constitutes our continuing operations and the discussion that follows focuses almost entirely on its operations.
Results of Operations
Net Interest Income
One of the principal determinants of a bank's income is its net interest income,
which is the difference between (i) the interest that a bank earns on loans,
investment securities and other interest earning assets, on the one hand, and
(ii) its interest expense, which consists primarily of the interest it must pay
to attract and retain deposits and the interest that it pays on borrowings and
other interest-bearing liabilities, on the other hand. A bank's interest income
and interest expense are, in turn, affected by a number of factors, some of
which are outside of its control, including national and local economic
conditions and the monetary policies of the Federal Reserve Board which affect
interest rates, the demand for loans by prospective borrowers, the competition
among banks and other lending institutions for loans and deposits, and the
ability of borrowers to meet their loan payment obligations. Net interest
income, when expressed as a percentage of total average interest earning assets,
is a banking organization's "net interest margin."
Fiscal 2008 Compared to Fiscal 2007. In fiscal 2008, our net interest income decreased by $4.3 million, or 14%, to $27.1 million, from $31.4 million in fiscal 2007, primarily as a result of an $8.4 million, or 12%, decrease in interest income that more than offset a $4.1 million, or 10.7%, decrease in interest expense. The decrease in interest income in 2008 over 2007 was due primarily to a decrease in the average interest rate earned (i) on loans to 6.24% in 2008 from 7.41% in 2007, and (ii) on short-term investments to 1.72% in 2008 from 5.03% in 2007, primarily as a result of the interest rate reductions implemented by the Federal Reserve Board during 2008.
The average interest rate on deposits and other interest-bearing liabilities declined to 4.02% in 2008 from 4.7% in 2007, primarily due to those same interest rate reductions by the Federal Reserve Board, which enabled us to reduce interest rates on deposits and benefit from reductions in interest rates on borrowings and other interest bearing liabilities.
Our net interest margin for fiscal 2008 decreased to 2.47% in 2008 from 2.96% in
fiscal 2007, as the decrease in interest income was greater than the decrease in
interest expense in 2008, because the beneficial impact of the decline in
interest rates on our interest expense in 2008 was partially offset by the
effects on interest expense of (i) an increase in the volume of our deposits and
(ii) a change in the mix of our deposits to a higher proportion of time deposits
(on which we pay higher rates of interest than on other deposits) and a lower
proportion of non-interest bearing deposits.
Fiscal 2007 Compared to Fiscal 2006. In fiscal 2007, our net interest decreased by $941,000, or 3%, to $31.4 million, from $32.4 million in fiscal 2006, primarily as a result of a $7.2 million, or 23%, increase in interest expense that more than offset a $6.3 million, or 10% increase in interest income.
The increase in interest expense in 2007 over 2006 was due primarily to
(i) increases of $101 million in the average volume of our time deposits, on
which we pay higher rates of interest than on core deposits, and (ii) an
increase in the average interest rate paid on interest-bearing liabilities to
4.76% in 2007 from 4.24% in 2006, primarily as a result of the increases in
interest rates promulgated by the Federal Reserve Board during the first nine
months of 2007.
The increase in interest income was primarily attributable to (i) an increase of $47 million, or 7%, in the average volume of our outstanding loans during fiscal 2007 over fiscal 2006 and (ii) an increase in yields on interest earning assets to 6.60% in 2007 from 6.50% in 2006, due primarily to the effects of interest rate increases by the Federal Reserve Board in furtherance of its national monetary policies. We funded the increase in loan volume by increasing the volume of interest-bearing deposits and with funds generated by sales of securities held for sale.
Our net interest margin for fiscal 2007 decreased to 2.96% from 3.30% in fiscal 2006. That decrease was primarily attributable to the overall increase in deposits, together with a change in the mix of our deposits to a higher proportion of time deposits and a lower proportion of non-interest bearing deposits, in 2007 compared to 2006, which caused our interest expense to increase at a faster rate than did our interest income.
Information Regarding Average Assets and Average Liabilities
The following tables set forth information regarding our average balance sheet,
yields on interest earning assets, interest expense on interest-bearing
liabilities, the interest rate spread and the interest rate margin for the years
ended December 31, 2008, 2007, and 2006. Average balances are calculated based
on average daily balances.
Year Ended December 31,
2008 2007
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Interest earning assets:
Short-term investments(1) $ 53,753 $ 924 1.72 % $ 71,127 $ 3,581 5.03 %
Securities available for sale and
stock(2) 230,021 10,148 4.41 % 246,332 11,266 4.57 %
Loans (3) 809,543 50,539 6.24 % 744,589 55,211 7.41 %
Total earning assets 1,093,317 61,611 5.64 % 1,062,048 70,058 6.60 %
Noninterest earning assets 33,321 28,524
Total Assets $ 1,126,638 $ 1,090,572
Interest-bearing liabilities:
Interest-bearing checking accounts $ 20,176 108 0.53 % $ 22,245 154 0.69 %
Money market and savings accounts 134,701 2,619 1.94 % 154,263 5,337 3.46 %
Certificates of deposit 455,138 20,746 4.56 % 396,909 20,454 5.15 %
Other borrowings 231,057 9,952 4.31 % 214,979 10,716 4.98 %
Junior subordinated debentures 17,682 1,073 6.07 % 23,142 1,956 8.45 %
Total interest-bearing liabilities 858,754 34,498 4.02 % 811,538 38,617 4.76 %
Noninterest-bearing liabilities 171,127 186,681
Total Liabilities 1,029,881 998,219
Shareholders' equity 96,757 92,353
Total Liabilities and Shareholders'
Equity $ 1,126,638 $ 1,090,572
Net interest income $ 27,113 $ 31,441
Interest rate spread 1.62 % 1.84 %
Net interest margin 2.47 % 2.96 %
|
(1) Short-term investments consist of federal funds sold and interest bearing deposits that we maintain at other financial institutions.
(2) Stock consists of Federal Home Loan Bank Stock and Federal Reserve Bank Stock.
(3) Loans include the average balance of nonaccrual loans.
Year Ended December 31, 2006
Average Balance Interest Earned/ Paid Average Yield/Rate
(Dollars in thousands)
Short-term investments(1) $ 27,726 $ 1,403 5.06 %
Securities available for sale and
stock(2) 257,036 11,423 4.44 %
Loans (3) 697,176 50,974 7.31 %
Total earning assets 981,938 63,800 6.50 %
Noninterest earning assets 29,538
Total Assets $ 1,011,476
Interest-bearing liabilities:
Interest-bearing checking accounts $ 24,490 166 0.68 %
Money market and savings accounts 142,416 4,419 3.10 %
Certificates of deposit 296,070 13,780 4.65 %
Other borrowings 250,277 10,799 4.32 %
Junior subordinated debentures 27,837 2,254 8.10 %
Total interest-bearing liabilities 741,090 31,418 4.24 %
Noninterest-bearing liabilities 186,845
Total Liabilities 927,935
Shareholders' equity 83,541
Total Liabilities and
Shareholders' Equity $ 1,011,476
. . .
|
|
|