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PCBK > SEC Filings for PCBK > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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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 consolidated financial statements and the notes included in this report and in our 2011 Annual Report. All 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 our strategies and expectations regarding our funding, our net interest margin and factors affecting the margin, our problem assets, allowance for loan losses, noninterest expense and real estate expense; our expectations regarding the expansion of the Company's commercial and industrial loan and owner-occupied lending and the anticipated growth in net outstanding loans; our expectations and strategies regarding our securities portfolio, recognition of other than temporary impairment (OTTI) and the factors impacting OTTI, and our intention to sell or hold securities, or expectations regarding the recovery of their carrying value; our strategies and expectations regarding the Company's capital levels and liquidity, core deposits, and large depositor relationships, and our expectations regarding the new capital standards under the Dodd-Frank Act and the Basel Committee capital and liquidity standards and proposed regulations by the U.S. federal banking agencies and the effect of these developments on our business; our assessment of significant factors and developments that have affected or may affect our results; the economic outlook for the national, regional and local economies; pending and recent legislative and regulatory actions and future developments and their anticipated impacts on our business and operations; our assessment of the ultimate outcome of legal actions and their potential impact on our business; loan portfolio composition and risk grading; expected rates of return and projected results; critical accounting policies and estimates and the impact or anticipated impact of recent accounting pronouncements on our financial results; our expectations regarding the impact of acquisitions on our business and results of operations; and projected results for 2012, the expected interest rate environment, 2012 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, or the documents incorporated by reference:

Local, regional 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 growth at historical rates, maintain the quality of our earning assets and level of earnings.

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, or otherwise, 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.

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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 periodic reviews thereof under relevant regulatory and accounting requirements may increase.

Changes in laws and regulations (including laws and regulations concerning taxes, banking, capital requirements, 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 the economy, the banking industry and 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 our results of operations.

Integration of an acquisition including results relating to: the total cost of integration; the retention of key personnel; the time required to complete the integration, the amount of longer-term cost savings; continued growth or the overall performance of the acquired company or combined entity could impact our business.

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.

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 "Risk Factors" in Item 1A of this Report and this "Management's Discussion and Analysis of Financial Condition and Results of Operations. 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.


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.

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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 below and in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2011, in Item 8 of the company's Annual Report on Form 10-K. Management believes that the following policies and those disclosed in the Notes to Consolidated Financial Statements 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.

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 3 of the Notes to Consolidated Financial Statements in Item 1 of this report.

Goodwill and Intangible Assets

At September 30, 2012, the Company had $22,068 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, 2011.

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 7 of the Notes to Consolidated Financial Statements in Item 1 of this Report.

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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 May 2011, the FASB issued Accounting Standards Update No. 2011-04, "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. 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 effective during interim and annual periods beginning after December 15, 2011. The adoption of this Accounting Standards Update did not have a material impact on the Company's consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, "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, 2011. The adoption of this Accounting Standards Update did not have a material impact on the Company's consolidated financial statements.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, "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, 2011. 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 2011, the FASB issued Accounting Standards Update No. 2011-12, "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. 2011-05." The amendments of this Update supersede changes to those paragraphs in Update 2011-05 that pertain to how, when, and where reclassification adjustments

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are presented. The amendments of this Update are effective at the same time as the amendments in Update 2011-05 so that entities will not be required to comply with the presentation requirements in Update 2011-05 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, 2011. The adoption of this Accounting Standard Update did not have a material impact on the Company's consolidated financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. With this Update, a company testing indefinite-lived intangibles for impairment now has the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with current guidance. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

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Results of Operations - Overview

                                                    For the three months ended September 30,                      For the nine months ended September 30,
                                                 2012                  2011               % Change             2012                   2011              % Change
Net income                                   $       3,438         $       2,588               32.8 %     $         9,270        $         6,194             49.7 %
Operating revenue (1)                        $      13,900         $      14,598               -4.8 %     $        41,955        $        42,540             -1.4 %
Earnings per share
Basic                                        $        0.19         $        0.14                 36 %     $          0.51        $          0.34             50.0 %
Diluted                                      $        0.19         $        0.14                 36 %     $          0.51        $          0.34             50.0 %
Assets, period-end                                                                                        $     1,350,422        $     1,251,571              7.9 %
Loans, period-end (2)                                                                                     $       836,205        $       827,812              1.0 %
Core deposits, period end (3)                                                                             $       882,614        $       880,727              0.2 %
Deposits, period-end                                                                                      $       980,162        $       951,617              3.0 %
Return on average assets (4)                          1.03 %                0.83 %                                   0.95 %                 0.68 %
Return on average equity (4)                          7.52 %                5.74 %                                   6.85 %                 4.71 %
Return on average tangible equity (4) (5)             8.56 %                6.56 %                                   7.81 %                 5.40 %

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

(2) Net of deferred fees; excludes loans held-for-sale, and allowance for loan losses.

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

(4) Amounts annualized.

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

The Company earned $3,438 in the third quarter 2012, an increase of $850 or 32.8% over third quarter 2011. The increase in net income was due to a lower provision for loan losses, and lower noninterest expense. The Company recorded no provision for loan losses during the third quarter 2012 due to net loan recoveries of $108. The third quarter 2012 provision for loan losses was down $1,750 from last year and reflects overall improvement in credit quality of the loan portfolio, lower nonperforming assets, and lower net charge offs. The decline in noninterest expense of $209 from third quarter last year was primarily related to lower FDIC assessments and lower expenses associated with problem assets, specifically other real estate valuation write downs.

During the third quarter 2012, the Company experienced its third consecutive quarter of growth in outstanding loans. Outstanding loans, net of deferred fees, at September 30, 2012, were $836,205, up $10,160 over June 30, 2012. Excluding $13,242 of loans transferred to other real estate owned during the quarter, gross loans increased $23,402 during the current quarter. Outstanding loans at September 30, 2012, were up $16,053 over December 31, 2011. The Company continued to experience growth in commercial and owner-occupied commercial real estate loans. Outstanding core deposits at September 30, 2012, were $882,614, up $30,833 over the prior quarter end. The Company experienced a typical seasonal core deposit pattern during the quarter where outflows historically occurr during the first half of the year followed by growth during the second half of the year.

Period end assets at September 30, 2012, were $1,350,422, up $98,851 or 7.9 % over September 30, 2011. Growth in period-end assets resulted primarily from a $7,397 increase in net loans, a $15,469 increase in BOLI investment, and a $66,057 increase in the securities portfolio. Year-to-date average assets for the nine months ended September 30, 2012, were $1,303,326, up $87,058 over last year. Growth is primarily due to growth in average securities-available-for-sale and the purchase of the BOLI investment.

In February 2012, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's shares, or approximately 922,000 shares, with the purchases to take place over a 12-month period. During the third quarter 2012, the Company repurchased 166,612 shares at a weighted average price of $9.00 per share. Since the inception of the plan, the Company has repurchased 576,537 shares at a weighted average price of $8.82. Total shares repurchased to date amount to 3.1% of the total outstanding shares at the commencement of the repurchase plan.

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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 these 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.

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 shareholders' equity.

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