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| PCBC > SEC Filings for PCBC > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
This discussion is designed to provide insight into Management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources, and interest rate sensitivity. This Form 10-Q should be read in conjunction with the 2008 10-K and unaudited interim consolidated financial statements and notes hereto and financial information appearing elsewhere in this report.
OVERVIEW AND HIGHLIGHTS
Net loss for the third quarter of 2009 was $40.7 million or ($0.87) per share to common stockholders, compared with net loss of $47.5 million, or ($1.03) per share to common stockholders, reported for the third quarter of 2008. Net loss for the nine month period ended September 30, 2009 was $411.3 million or ($8.81) per share to common stockholders, compared with net income of $19.1 million or $0.41 per diluted share for the nine month period ended September 30, 2008.
The significant factors impacting the Company's net loss for the three and nine month periods ending September 30, 2009 compared to the same periods in 2008 were:
n Provision for loan losses of $42.4 million for the third quarter of 2009 and $390.6 million for the nine month period ended September 30, 2009. This provision reflects a provision for loan losses for the Core Bank of $47.1 million and $314.8 million for the three and nine month periods ended September 30, 2009, respectively.
n A goodwill impairment charge of $128.7 million in the second quarter of 2009.
n A decrease in net interest income for the comparable periods was due to a sharp decline in interest rates during the comparable periods. This decline was mostly attributed to the Federal Open Market Committee of the Federal Reserve System ("FOMC") decreasing interest rates over the comparable periods. The current FOMC interest rate has remained at 0.00% - 0.25% since December 18, 2008.
n A full valuation allowance on the Company's deferred tax asset.
n The decrease in total assets of $1.67 billion since December 31, 2008 which is mostly attributed to the 2009 RAL season offset by the build-up of liquidity within the balance sheet. For the 2009 RAL season, the Company funded all RALs on balance sheet as it was not able to set-up a securitization facility due to the current economic conditions which caused the credit markets to tighten. The 2009 RAL season was mostly pre-funded using brokered CDs in the fourth quarter of 2008 which also increased cash at December 31, 2008. The profitability of the 2009 RAL season decreased compared to 2008 due to the additional interest expenses from the funding on balance sheet and higher loan loss rate in 2009.
The impact to the Company from these items will be discussed in more detail throughout the analysis sections of this report as they pertain to the Company's overall comparative performance for the periods ended September 30, 2009 compared to the periods ended September 30, 2008.
BUSINESS
PCB is a bank holding company. All references to the Company apply to PCB and its subsidiaries on a consolidated basis. The Company's organizational structure and description of services are discussed in Item 1, "Business" and in Note 1, "Summary of Significant Accounting Policies" of the 2008 10-K and should be read in conjunction with this Form 10-Q. Terms and acronyms used throughout this document are defined in the glossary on pages 68 through 70. Throughout the MD&A of this Form 10-Q, there is discussion of the Company's financial information with and without the RAL and RT programs. When the discussion refers to the "Core Bank", this means all of the financial activity of the Consolidated Financial Statements excluding the RAL and RT programs.
Segments
In January 2009, the CEO presented his strategic vision for the Company to the Board of Directors and determined that the Commercial Banking and Wealth Management segments should be combined into one segment. The newly combined segment is called the Commercial & Wealth Management Group. The new Commercial & Wealth Management Group provides products and services to meet the needs of middle market companies and high net-worth individuals under one platform and one manager. The same services and products continue to be offered as described in the 2008
10-K for the Commercial and Wealth Management segments but, under one platform with a common business model. The new combined segment will no longer offer SBA loans as these products service small businesses and are offered through the Community Banking segment.
The Company's businesses as viewed by Management are organized by product line and result in three operating segments. The operating segments are: Community Banking, Commercial & Wealth Management Group ("CWMG") and RAL and RT Programs. The administrative functions and the Holding Company operations of the Company are not considered part of the operating activities of the Company and for financial reporting purposes the unallocated activity is reported in the "All Other" segment. A description of the segments, financial results and allocation methodology is discussed in the Company's Consolidated Financial Statements within the 2008 10-K, Note 24, "Segments" and the current financial results for each segment are presented in this Form 10-Q, Note 15, "Segments" in the Consolidated Financial Statements. The significant changes within the financial statements that relate to each segment are incorporated in the MD&A below.
SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are disclosed in this Form 10-Q in Note 1, "Summary of Significant Accounting Polices" which are an update to the 2008 10-K, Note 1, "Summary of Significant Accounting Policies" on pages 87-101. Management believes that a number of the significant accounting policies are essential to the understanding of the Company's financial condition and results of operation because they involve estimates, judgment, or are otherwise less subject to precise measurement and because the quality of the estimates materially impact those results. A number of significant accounting policies are used in the preparation of the Company's consolidated financial statements. In addition, the "Critical Accounting Polices" section of the MD&A on pages 63-67 of the 2008 10-K should also be read in conjunction with this Form 10-Q. The Critical Accounting Policies include: allowance for loan losses, accounting for income taxes, goodwill and other intangible assets and revenue recognition for the RAL and RT Programs. Management believes these estimates and assumptions to be reasonably accurate, actual results may differ.
RESULTS OF OPERATIONS
INTEREST INCOME
The following table presents a summary of interest income for the three month
periods ended September 30, 2009 and 2008:
Three-Months Ended
September 30,
Change
2009 2008 $ %
(dollars in thousands)
Interest income:
Loans $ 75,691 $ 88,109 $ (12,418 ) (14.1 %)
Investment securities-trading 374 2,484 (2,110 ) (84.9 %)
Investment securities-available-for-sale 9,909 12,021 (2,112 ) (17.6 %)
Other 542 119 423 355.5 %
Total $ 86,516 $ 102,733 $ (16,217 ) (15.8 %)
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Interest income for the third quarter of 2009 decreased by $16.2 million or 15.8% compared to the third quarter of 2008 primarily due to a decline in interest income from loans of $12.4 million or 14.1%. Interest income on loans declined mostly due to interest rate declines resulting from the FOMC lowering short-term interest rates for the comparable periods and the sale of residential and commercial loans as disclosed in Note 5, "Loan Sales and Transactions" of the Consolidated Financial Statements of this Form 10-Q.
Interest income is immediately impacted when short-term interest rates decrease since most adjustable rate loans and securities are required to immediately adjust when the interest rates change. A majority of the commercial and consumer loans have adjustable interest rates. Commercial and consumer loan interest income decreased by $6.4 million and $1.8 million, respectively when comparing the three month periods ended September 30, 2009 to September 30, 2008. The residential real estate loan portfolio's interest income decreased by $2.2 million. This decrease is mostly attributable to the sale of held for investment ("HFI") loans and most of the residential real estate loans originated were originated for sale. Commercial loans are primarily from the CWMG segment while consumer and residential loans are mostly from the Community Banking segment.
Interest income from securities also decreased as a result of selling a majority of the trading securities during the third quarter and, in the AFS portfolio, interest rates on securities decreased as investment securities recently purchased are more liquid but, have lower interest rates. At the same time, adjustable rate securities have adjusted lower due to the decrease in long term interest rates.
The following table presents a summary of interest income for the nine month periods ended September 30, 2009 and 2008:
Nine-Months Ended
September 30,
Change
2009 2008 $ %
(dollars in thousands)
Interest income:
Loans $ 383,753 $ 371,358 $ 12,395 3.3 %
Investment securities-trading 5,061 4,121 940 22.8 %
Investment securities-available-for-sale 32,838 39,366 (6,528 ) (16.6 %)
Other 2,339 2,281 58 2.5 %
Total $ 423,991 $ 417,126 $ 6,865 1.6 %
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Interest income for the nine month period ended September 30, 2009 was $424.0 million, an increase of $6.9 million compared to the same nine month period in 2008. This increase is mostly attributable to interest income from RALs. The RAL portfolio was the primary driver of the increase in loan interest income due to the bank not securitizing and selling RALs in 2009 which it had in prior RAL seasons. When RALs are securitized, they are removed from the Company's balance sheet and sold to third parties. The fees associated with the RALs sold into the securitization are then included in the gain on sale calculation which is reported in non-interest income. For the nine month period ended September 30, 2009 and 2008, fees which are reported in interest income for RALs was $151.6 million and $108.8 million, respectively. In 2008, the fees on sold RALs were $64.1 million.
Excluding the interest income from RALs, Core Bank interest income from loans was $232.1 million compared to $262.6 million for the nine month periods ended September 30, 2009 and 2008, respectively. Core Bank interest income from loans decreased by $30.5 million or 11.6%. The decline of Core Bank interest income resulted from the FOMC lowering short-term interest rates for the comparable periods and the increase of charged-off and non-performing loans also impacted the decrease in interest income. Commercial loans interest income decreased by $19.8 million when comparing the nine month periods ended September 30, 2009 to the same period in 2008 mostly due to the decrease in the FOMC interest rates. Core Bank consumer loans interest income decreased by $6.3 million or 20.6% when comparing the nine month periods ended September 30, 2009 to September 30, 2008 which is mostly due to decreased interest rates paid on consumer loans from the FOMC decreasing interest rates.
Interest income from AFS securities decreased by $6.5 million or 16.6%. This decrease is mostly attributed to investing in more liquid securities at lower interest rates as well as a decrease in interest rates paid on adjustable interest rate securities.
INTEREST EXPENSE
The following table presents a summary of interest expense for the three month
periods ended September 30, 2009 and 2008:
Three-Months Ended
September 30,
Change
2009 2008 $ %
(dollars in thousands)
Interest expense:
Deposits $ 19,874 $ 18,565 $ 1,309 7.1%
Securities sold under agreements to repurchase and
Federal funds purchased 2,156 3,444 (1,288 ) (37.4%)
Long-term debt and other borrowings 13,832 19,902 (6,070 ) (30.5%)
Total $ 35,862 $ 41,911 $ (6,049 ) (14.4%)
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Interest expense decreased by $6.0 million, or 14.4% when comparing the three month periods ended September 30, 2009 to September 30, 2008. This decrease was mostly due to a decrease in interest expense paid on long term debt and other borrowings due to the repayment of high interest FHLB advances in the second quarter of 2009. This decrease was offset by an increase in interest expense for deposits.
A summary of interest expense by deposit type is below:
Three-Months Ended
September 30,
2009 2008
(in thousands)
NOW accounts $ 968 $ 2,005
Money market deposit accounts 852 2,371
Other savings deposits 600 284
Time certificates of $100,000 or more 9,684 8,936
Other time deposits 7,770 4,969
Total $ 19,874 $ 18,565
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A majority of the increase in interest expense is attributable to the interest expense on time deposits which was $17.5 million for the three month period ended September 30, 2009 compared to $13.9 million for the three month period ended September 30, 2008. The increase in interest expense for time deposits is attributable to the increase in average balance. The increase of average balance is mostly from customer time deposits and brokered CDs.
The following table presents a summary of interest expense for the nine month periods ended September 30, 2009 and 2008:
Nine-Months Ended
September 30,
Change
2009 2008 $ %
(dollars in thousands)
Interest expense:
Deposits $ 76,481 $ 65,377 $ 11,104 17.0 %
Securities sold under agreements to repurchase
and Federal funds purchased 8,019 9,859 (1,840 ) (18.7 %)
Long-term debt and other borrowings 47,286 55,516 (8,230 ) (14.8 %)
Total $ 131,786 $ 130,752 $ 1,034 0.8 %
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Interest expense for the nine month period ending September 30, 2009 increased by $1.0 million to $131.8 million for the comparable period mostly resulting from the additional expense for the funding of the 2009 RAL season with brokered CDs offset by a reduction in interest expense from FHLB advances due to the repayment of high interest advances that were replaced with lower interest borrowings.
A summary of deposit expense by deposit type is below:
Nine-Months Ended
September 30,
2009 2008
(in thousands)
NOW accounts $ 5,241 $ 8,072
Money market deposit accounts 4,284 9,880
Other savings deposits 2,274 1,133
Time certificates of $100,000 or more 32,755 31,364
Other time deposits 31,927 14,928
Total $ 76,481 $ 65,377
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Interest expense paid on deposits was $76.5 million compared to $65.4 million for the nine month periods ended September 30, 2009 and 2008, respectively. This increase is mostly attributed to the interest expense paid for brokered CDs used to fund RALs for the 2009 season. Management also started purchasing brokered CDs during the third quarter of 2009 to build liquidity due to the current economic climate. The interest expense for these brokered CDs are included in other time deposits which increased by $17.0 million for the comparable nine month periods ended September 30, 2009 and 2008 and contributed to a majority of the interest expense increase. At the same time, NOW accounts and money market accounts interest expense decreased by $8.4 million when comparing the nine month periods ended September 30, 2009 to 2008. This decrease is due to reducing interest rates on certain deposit products so, that they were more consistent with the Bank's competitors.
NET INTEREST MARGIN
The following tables present net interest margin for the comparable three month
periods:
For the Three-Months Ended September 30,
2009 2008
Average Average
Balance Income Rate Balance Income Rate
(dollars in thousands)
Assets:
Commercial Paper $ - $ - - $ 6,408 $ 37 2.30 %
Interest-bearing demand deposits in
other financial institutions 844,503 542 0.25 % - - -
Federal funds sold - - - 19,287 82 1.69 %
Securities: (1)
Taxable 769,415 6,528 3.37 % 917,702 11,077 4.80 %
Non-taxable 296,668 3,755 5.06 % 265,132 3,428 5.17 %
Total securities 1,066,083 10,283 3.84 % 1,182,834 14,505 4.88 %
Loans: (2)
Commercial 1,074,709 12,376 4.57 % 1,207,890 18,792 6.19 %
Real estate-multi family &
nonresidential 2,781,170 39,600 5.70 % 2,752,603 41,567 6.04 %
Real estate-residential 1-4 family 1,095,890 15,712 5.73 % 1,203,771 17,889 5.94 %
Consumer 626,097 7,987 5.06 % 613,796 9,831 6.37 %
Other 2,185 16 2.91 % 2,251 30 5.30 %
Total loans, net 5,580,051 75,691 5.42 % 5,780,311 88,109 6.09 %
Total interest-earning assets 7,490,637 86,516 4.61 % 6,988,840 102,733 5.87 %
Market value adjustment (1) 28,008 18,580
Non-interest-earning assets 285,038 593,612
Total assets $ 7,803,683 $ 7,601,032
Liabilities and shareholders' equity:
Interest-bearing deposits:
Savings and interest-bearing
transaction accounts $ 1,723,386 2,420 0.56 % $ 1,891,370 4,660 0.98 %
Time certificates of deposit 2,563,570 17,454 2.70 % 1,849,236 13,905 2.99 %
Total interest-bearing deposits 4,286,956 19,874 1.84 % 3,740,606 18,565 1.97 %
Borrowed funds:
Securities sold under agreements to
repurchase and Federal funds
purchased 332,986 2,156 2.57 % 436,123 3,444 3.14 %
Other borrowings 1,481,399 13,832 3.70 % 1,656,597 19,902 4.78 %
Total borrowed funds 1,814,385 15,988 3.49 % 2,092,720 23,346 4.44 %
Total interest-bearing liabilities 6,101,341 35,862 2.33 % 5,833,326 41,911 2.86 %
Non-interest-bearing demand deposits 1,143,928 987,336
Other liabilities 140,616 80,479
Shareholders' equity 417,798 699,891
Total liabilities and shareholders'
equity $ 7,803,683 $ 7,601,032
Net interest income/margin $ 50,654 2.68 % $ 60,822 3.46 %
Loan information Core Bank:
Consumer loans, Core Bank 625,556 7,987 5.07 % 613,453 9,831 6.38 %
Loans, Core Bank 5,579,499 75,691 5.38 % 5,779,968 88,109 6.06 %
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(1) Average securities balances are based on amortized historical cost. The market value of securities are reported as a separate line item, above.
(2) Nonaccrual loans are included in loan balances. Interest income includes related fee income.
Volume and Rate Variance Analysis of Net Interest Income:
Three-Months Ended
September 30, 2009 vs. September 30, 2008
Change due to
Rate Volume Total Change
(in thousands)
Assets:
Commercial Paper $ (18 ) $ (19 ) $ (37 )
Interest-bearing demand deposits in
other financial institutions - 542 542
Federal funds sold (41 ) (41 ) (82 )
Securities:
Taxable (2,949 ) (1,600 ) (4,549 )
Non-taxable (76 ) 403 327
Total securities (3,025 ) (1,197 ) (4,222 )
Loans:
Commercial (4,514 ) (1,902 ) (6,416 )
Real estate-multi family &
nonresidential (2,395 ) 428 (1,967 )
Real estate-residential 1-4 family (616 ) (1,561 ) (2,177 )
Consumer (2,041 ) 197 (1,844 )
Other (13 ) (1 ) (14 )
Total loans (9,579 ) (2,839 ) (12,418 )
Total interest-earning assets $ (12,663 ) $ (3,554 ) $ (16,217 )
Liabilities:
Interest-bearing deposits:
Savings and interest-bearing
transaction accounts (1,855 ) (385 ) (2,240 )
Time certificates of deposit (1,449 ) 4,998 3,549
Total interest-bearing deposits (3,304 ) 4,613 1,309
Borrowed funds:
Securities sold under agreements to
repurchase and Federal funds purchased (560 ) (728 ) (1,288 )
Other borrowings (4,135 ) (1,935 ) (6,070 )
Total borrowed funds (4,695 ) (2,663 ) (7,358 )
Total interest bearing liabilities (7,999 ) 1,950 (6,049 )
Net interest income $ (4,664 ) $ (5,504 ) $ (10,168 )
Consumer loans, Core Bank $ (2,038 ) $ 194 $ (1,844 )
Loans, Core Bank $ (9,486 ) $ (2,932 ) $ (12,418 )
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Net Interest Margin
The net interest margin for the three months ended September 30, 2009 decreased to 2.68% compared to 3.46% for the same three month period of 2008. This net interest margin decrease is the result of declining interest rates received on average interest-earning assets which decreased by 126 basis points, partially offset by declining interest rates paid on average interest-bearing liabilities which decreased by 53 basis points for the comparable three month periods. Interest income from loans was the driver of the decrease in net interest margin with interest income decreasing by $12.4 million, or 67 basis points for the three month comparable periods ended September 30, 2009 and 2008. Of this decrease in interest income on loans, $9.6 million was attributable to a decrease in interest rates and $2.8 million was attributable to a decrease in average balance. Interest rates paid on commercial, residential real estate and consumer loans caused a majority of the decrease due to declining interest rates. Interest rates on these loan portfolios decreased by a combined total of 314 basis points when comparing the interest rates received on . . .
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