|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview
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 in Item 8 of this Report.
Our principal operating subsidiary is Pacific Mercantile Bank (the “Bank”), which is a California state chartered bank. The Bank accounts for substantially all of our consolidated revenues, expenses and income and our consolidated assets and liabilities. Accordingly, the following discussion focuses primarily on the Bank’s results of operations and financial condition.
As of
December 31, 2018
, our total assets, net loans and total deposits were
$1.3 billion
,
$1.1 billion
and
$1.1 billion
, respectively.
The Bank, which is headquartered in Orange County, California, approximately 40 miles south of Los Angeles, conducts a commercial banking business in Orange, Los Angeles, San Bernardino and San Diego counties in Southern California. The Bank is also a member of the Federal Reserve System and its deposits are insured, to the maximum extent permitted by law, by the Federal Deposit Insurance Corporation (the “FDIC”). For the years ended
December 31, 2018
,
2017
and
2016
, we operated as one reportable segment, Commercial Banking.
Unless the context otherwise requires, the “Company,” “we,” “our,” “ours,” and “us” refer to Pacific Mercantile Bancorp and its consolidated subsidiaries.
Results of Operations
Operating Results for the Years Ended
December 31, 2018
,
2017
, and
2016
Our operating results for the year ended
December 31, 2018
, compared to
December 31, 2017
, and for the year ended
December 31, 2017
, compared to
December 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018 vs. 2017
% Change
|
|
2017 vs. 2016
% Change
|
|
(Dollars in thousands)
|
|
|
|
|
Interest income
|
$
|
62,542
|
|
|
$
|
51,573
|
|
|
$
|
41,000
|
|
|
21.3
|
%
|
|
25.8
|
%
|
Interest expense
|
13,620
|
|
|
7,831
|
|
|
5,477
|
|
|
73.9
|
%
|
|
43.0
|
%
|
Provision for loan and lease losses
|
—
|
|
|
—
|
|
|
19,870
|
|
|
—
|
%
|
|
(100.0
|
)%
|
Non-interest income
|
4,635
|
|
|
4,374
|
|
|
2,937
|
|
|
6.0
|
%
|
|
48.9
|
%
|
Non-interest expense
|
36,970
|
|
|
37,758
|
|
|
36,401
|
|
|
(2.1
|
)%
|
|
3.7
|
%
|
Income tax provision (benefit)
|
(10,752
|
)
|
|
(91
|
)
|
|
16,832
|
|
|
11,715.4
|
%
|
|
(100.5
|
)%
|
Net (loss) income allocable to common shareholders
|
$
|
27,339
|
|
|
$
|
10,449
|
|
|
$
|
(34,643
|
)
|
|
161.6
|
%
|
|
(130.2
|
)%
|
Interest Income
2018
vs.
2017
.
Total interest income increased
21.3%
to
$62.5 million
for the year ended
December 31, 2018
from
$51.6 million
for the year ended
December 31, 2017
. This increase is primarily due to an increase in interest income on loans during the
year
ended
December 31, 2018
compared to the prior year due to an increase in average loan balances, as well as an increase in the average yield on loans. During the year ended
December 31, 2018
and
2017
, interest income on loans was
$57.6 million
and
$49.0 million
, respectively, yielding
5.38%
and
4.91%
on average loan balances of
$1.1 billion
and
$996.7 million
, respectively. The increase in the average loan balances is attributable to an increase in loan demand. The increase in the average yield on loans was primarily the result of the rising interest rate environment and the recovery of $1.6 million in interest income on two loans that had been on nonaccrual status but were paid in full during the year ended December 31, 2018 as compared to $1.1 million recovered on one loan relationship during the year ended December 31, 2017. The average yield on interest-earning assets was
4.78%
for the year ended
December 31, 2018
compared to
4.41%
for the year ended
December 31, 2017
.
During the
year
s ended
December 31, 2018
and
2017
, interest income from our securities available-for-sale and stock, was
$1.2 million
and
$1.2 million
, yielding
2.92%
and
2.49%
on average balances of
$39.7 million
and
$49.7 million
, respectively. The average securities balances decreased as a result of sales and maturities of, and payments on, securities throughout the year ended December 31, 2018, which was partially offset by purchases during the second half of the year. The increase in the average yield is attributable to the rising interest rate environment and the result of a Federal Home Loan Bank (“FHLB”) special dividend of $83 thousand received during December 2018. Interest income from our short-term investments, including our federal funds sold and interest-bearing deposits, was
$3.8 million
and
$1.4 million
for the
year
ended
December 31, 2018
and
2017
, respectively, yielding
1.92%
and
1.11%
on average balances of
$195.7 million
and
$123.8 million
, respectively. The increase in the average yield is a result of the rising interest rate environment. As a result, total interest income on investments increased for the
year
ended
December 31, 2018
.
2017
vs.
2016
.
Total interest income increased
25.8%
to
$51.6 million
for the year ended
December 31, 2017
from
$41.0 million
for the year ended
December 31, 2016
. This increase is primarily due to an increase in interest income on loans during the year ended December 31, 2017 compared to the prior year due to an increase in average loan balances, as well as an increase in the average yield on loans and the recovery of $1.1 million in interest income on a single loan relationship that had been on nonaccrual status but was paid in full during the third quarter of 2017. During the years ended
December 31, 2017
and
2016
, interest income on loans was
$49.0 million
and
$38.6 million
, respectively, yielding
4.91%
and
4.50%
on average loan balances of
$996.7 million
and
$857.7 million
, respectively. The increase in the average loan balances is attributable to an increase in loan demand. The increase in loan yield is primarily attributable to the actions of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) to raise short-term interest rates by 100 basis points since the fourth quarter of 2016. The average yield on interest-earning assets was
4.41%
for the year ended
December 31, 2017
compared to
3.81%
for the year ended
December 31, 2016
.
During the years ended
December 31, 2017
and
2016
, interest income from our securities available-for-sale and stock, was
$1.2 million
and
$1.6 million
, respectively, yielding
2.49%
and
2.76%
on average balances of
$49.7 million
and
$57.1 million
, respectively. The average securities balances decreased as a result of maturities of, and payments on, securities which we did not fully replace due to liquidity needs. Interest income from our short-term investments, including our federal funds sold and interest-bearing deposits, was
$1.4 million
and
$842 thousand
for the years ended
December 31, 2017
and
2016
, respectively, yielding
1.11%
and
0.52%
on average balances of
$123.8 million
and
$162.6 million
, respectively. The increase in the average yield is attributable to the Federal Reserve Board raising interest rates by 100 basis points since the fourth quarter of 2016. As a result, total interest income on investments increased for the
year
ended
December 31, 2017
.
Interest Expense
2018
vs.
2017
.
Total interest expense increased
73.9%
to
$13.6 million
for the
year
ended
December 31, 2018
from
$7.8 million
for the
year
ended
December 31, 2017
. The increase was primarily due to an increase in the volume of and average cost of funds of our interest-bearing liabilities to
1.60%
at
December 31, 2018
from
1.05%
at
December 31, 2017
, which consisted of deposits, borrowings and junior subordinated debentures, which was primarily the result of new client acquisition, our decision to increase the rate of interest paid on our certificates of deposit resulting from the rising interest rate environment, and an increase in our FHLB borrowings. Interest expense on our certificates of deposit for the years ended
December 31, 2018
and
2017
was
$5.3 million
and
$3.8 million
, respectively, with a cost of funds of
1.70%
and
1.26%
on average balances of
$315.2 million
and
$298.5 million
, respectively.
2017
vs.
2016
.
Total interest expense increased
43.0%
to
$7.8 million
for the year ended
December 31, 2017
from
$5.5 million
for the year ended
December 31, 2016
. The increase was primarily due to an increase in the volume of and average cost of funds of our interest-bearing liabilities to
1.05%
at
December 31, 2017
from
0.81%
at
December 31, 2016
, which consisted of deposits, borrowings and junior subordinated debentures, which was primarily the result of new client acquisition, our decision to increase the rate of interest paid on our certificates of deposit resulting from the rising interest rate environment, and an increase in our FHLB borrowings. Interest expense on our certificates of deposit for the years ended
December 31, 2017
and
2016
was
$3.8 million
and
$2.6 million
, respectively, with a cost of funds of
1.26%
and
0.99%
, on average balances of
$298.5 million
and
$263.6 million
, respectively.
Net Interest Margin
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. As a general rule, all other things being equal, the greater the difference
or “spread” between the amount of our interest income and the amount of our interest expense, the greater will be our net income; whereas, a decline in that difference or “spread” will generally result in a decline in our net income.
A bank’s interest income and interest expense are 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, competition in the market place for loans and deposits, the demand for loans 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.”
As a result of the Federal Reserve Board raising interest rates by 175 basis points since 2016, we experienced expansion in our net interest margin. The favorable impact of higher prevailing interest rates on our asset-sensitive balance sheet was evidenced in the
year
ended
December 31, 2018
as compared to the year ended December 31, 2016. While we are unable to acertain whether the Federal Reserve Board will continue to increase short-term interest rates in the future, we expect the favorable impact on our net interest margin to remain in the event that interest rates continue to rise. However, we believe that the competition for deposits is increasing and could lead to increases in the cost of interest-bearing deposit liabilities that may partially offset the contractual increase in the yield on earning assets.
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, 2018
,
2017
and
2016
. Average balances are calculated based on average daily balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Average
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
|
|
Average
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
|
|
Average
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
|
|
(Dollars in thousands)
|
Interest earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
(1)
|
$
|
195,736
|
|
|
$
|
3,756
|
|
|
1.92
|
%
|
|
$
|
123,761
|
|
|
$
|
1,379
|
|
|
1.11
|
%
|
|
$
|
162,585
|
|
|
$
|
842
|
|
|
0.52
|
%
|
Securities available for sale and stock
(2)
|
39,744
|
|
|
1,160
|
|
|
2.92
|
%
|
|
49,745
|
|
|
1,237
|
|
|
2.49
|
%
|
|
57,135
|
|
|
1,578
|
|
|
2.76
|
%
|
Loans
(3)
|
1,071,874
|
|
|
57,626
|
|
|
5.38
|
%
|
|
996,696
|
|
|
48,957
|
|
|
4.91
|
%
|
|
857,666
|
|
|
38,580
|
|
|
4.50
|
%
|
Total interest-earning assets
|
1,307,354
|
|
|
62,542
|
|
|
4.78
|
%
|
|
1,170,202
|
|
|
51,573
|
|
|
4.41
|
%
|
|
1,077,386
|
|
|
41,000
|
|
|
3.81
|
%
|
Noninterest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
16,785
|
|
|
|
|
|
|
14,482
|
|
|
|
|
|
|
15,533
|
|
|
|
|
|
All other assets
(3)
|
14,577
|
|
|
|
|
|
|
(1,116
|
)
|
|
|
|
|
|
14,550
|
|
|
|
|
|
Total assets
|
$
|
1,338,716
|
|
|
|
|
|
|
$
|
1,183,568
|
|
|
|
|
|
|
$
|
1,107,469
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking accounts
|
$
|
69,841
|
|
|
$
|
363
|
|
|
0.52
|
%
|
|
$
|
87,771
|
|
|
$
|
347
|
|
|
0.40
|
%
|
|
$
|
60,024
|
|
|
162
|
|
|
0.27
|
%
|
Money market and savings accounts
|
412,366
|
|
|
6,358
|
|
|
1.54
|
%
|
|
334,703
|
|
|
2,859
|
|
|
0.85
|
%
|
|
327,401
|
|
|
2,048
|
|
|
0.63
|
%
|
Certificates of deposit
|
315,189
|
|
|
5,349
|
|
|
1.70
|
%
|
|
298,531
|
|
|
3,752
|
|
|
1.26
|
%
|
|
263,569
|
|
|
2,610
|
|
|
0.99
|
%
|
Other borrowings
|
36,209
|
|
|
705
|
|
|
1.95
|
%
|
|
4,538
|
|
|
203
|
|
|
4.47
|
%
|
|
7,407
|
|
|
75
|
|
|
1.01
|
%
|
Junior subordinated debentures
|
17,527
|
|
|
845
|
|
|
4.82
|
%
|
|
17,527
|
|
|
670
|
|
|
3.82
|
%
|
|
17,527
|
|
|
582
|
|
|
3.32
|
%
|
Total interest bearing liabilities
|
851,132
|
|
|
13,620
|
|
|
1.60
|
%
|
|
743,070
|
|
|
7,831
|
|
|
1.05
|
%
|
|
675,928
|
|
|
5,477
|
|
|
0.81
|
%
|
Noninterest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
348,923
|
|
|
|
|
|
|
326,105
|
|
|
|
|
|
|
299,447
|
|
|
|
|
|
Accrued expenses and other liabilities
|
10,931
|
|
|
|
|
|
|
7,566
|
|
|
|
|
|
|
6,380
|
|
|
|
|
|
Shareholders' equity
|
127,730
|
|
|
|
|
|
|
106,827
|
|
|
|
|
|
|
125,714
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
|
1,338,716
|
|
|
|
|
|
|
$
|
1,183,568
|
|
|
|
|
|
|
$
|
1,107,469
|
|
|
|
|
|
Net interest income
|
|
|
$
|
48,922
|
|
|
|
|
|
|
$
|
43,742
|
|
|
|
|
|
|
$
|
35,523
|
|
|
|
Net interest income/spread
|
|
|
|
|
3.18
|
%
|
|
|
|
|
|
3.36
|
%
|
|
|
|
|
|
3.00
|
%
|
Net interest margin
|
|
|
|
|
3.74
|
%
|
|
|
|
|
|
3.74
|
%
|
|
|
|
|
|
3.30
|
%
|
|
|
(1)
|
Short-term investments consist of federal funds sold and interest bearing deposits that we maintain at other financial institutions.
|
|
|
(2)
|
Stock consists of FHLB stock and Federal Reserve Bank stock.
|
|
|
(3)
|
Loans include the average balance of nonaccrual loans and loan fees. The allowance for loan and lease losses is included within the "All other assets" line item.
|
The following table sets forth changes in interest income, including loan fees, and interest paid in each of the years ended
December 31, 2018
,
2017
and
2016
and the extent to which those changes were attributable to changes in (i) the volumes of or in the rates of interest earned on interest-earning assets and (ii) the volumes of or the rates of interest paid on our interest-bearing liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Compared to 2017
Increase (Decrease) due to Changes in
|
|
2017 Compared to 2016
Increase (Decrease) due to Changes in
|
|
Volume
|
|
Rates
|
|
Total
Increase
(Decrease)
|
|
Volume
|
|
Rates
|
|
Total
Increase
(Decrease)
|
|
(Dollars in thousands)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
(1)
|
$
|
1,060
|
|
|
$
|
1,317
|
|
|
$
|
2,377
|
|
|
$
|
(241
|
)
|
|
$
|
778
|
|
|
$
|
537
|
|
Securities available for sale and stock
(2)
|
(272
|
)
|
|
195
|
|
|
(77
|
)
|
|
(193
|
)
|
|
(148
|
)
|
|
(341
|
)
|
Loans
|
3,848
|
|
|
4,821
|
|
|
8,669
|
|
|
6,621
|
|
|
3,756
|
|
|
10,377
|
|
Total earning assets
|
4,636
|
|
|
6,333
|
|
|
10,969
|
|
|
6,187
|
|
|
4,386
|
|
|
10,573
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking accounts
|
(80
|
)
|
|
96
|
|
|
16
|
|
|
92
|
|
|
93
|
|
|
185
|
|
Money market and savings accounts
|
783
|
|
|
2,716
|
|
|
3,499
|
|
|
47
|
|
|
764
|
|
|
811
|
|
Certificates of deposit
|
219
|
|
|
1,378
|
|
|
1,597
|
|
|
377
|
|
|
765
|
|
|
1,142
|
|
Borrowings
|
677
|
|
|
(175
|
)
|
|
502
|
|
|
(38
|
)
|
|
166
|
|
|
128
|
|
Junior subordinated debentures
|
—
|
|
|
175
|
|
|
175
|
|
|
—
|
|
|
88
|
|
|
88
|
|
Total interest-bearing liabilities
|
1,599
|
|
|
4,190
|
|
|
5,789
|
|
|
478
|
|
|
1,876
|
|
|
2,354
|
|
Net interest income
|
$
|
3,037
|
|
|
$
|
2,143
|
|
|
$
|
5,180
|
|
|
$
|
5,709
|
|
|
$
|
2,510
|
|
|
$
|
8,219
|
|
|
|
(1)
|
Short-term investments consist of federal funds sold and interest bearing deposits that we maintain at financial institutions.
|
|
|
(2)
|
Stock consists of FHLB stock and Federal Reserve Bank stock.
|
Provision for Loan and Lease Losses
We maintain reserves to provide for loan losses that occur in the ordinary course of the banking business. When it is determined that the payment in full of a loan has become unlikely, the carrying value of the loan is reduced (“written down”) to what management believes is its realizable value or, if it is determined that a loan no longer has any realizable value, the carrying value of the loan is written off in its entirety (a loan “charge-off”). Loan charge-offs and write-downs are charged against our allowance for loan and lease losses (“ALLL”). The amount of the ALLL is increased periodically to replenish the ALLL after it has been reduced due to loan write-downs or charge-offs. The ALLL also is increased or decreased periodically to reflect increases or decreases in the volume of outstanding loans and to take account of changes in the risk of probable loan losses due to financial performance of borrowers, the value of collateral securing non-performing loans or changing economic conditions. Increases in the ALLL are made through a “provision for loan and lease losses” that is recorded as an expense in the statement of operations. Increases in the ALLL are also recognized through the recovery of charged-off loans which are added back to the ALLL. As such, recoveries are a direct offset for a provision for loan and lease losses that would otherwise be needed to replenish or increase the ALLL.
We employ economic models and data that conform to bank regulatory guidelines and reflect sound industry practices as well as our own historical loan loss experience to determine the sufficiency of the ALLL and any provisions needed to increase or replenish the ALLL. Those determinations involve judgments and assumptions about current economic conditions and external events that can impact the ability of borrowers to meet their loan obligations. However, the duration and impact of these factors cannot be determined with any certainty. As such, unanticipated changes in economic or market conditions, bank regulatory guidelines or the sound practices that are used to determine the sufficiency of the ALLL, could require us to record additional, and possibly significant, provisions to increase the ALLL. This would have the effect of reducing reportable income or, in the most extreme circumstance, creating a reportable loss. In addition, the Federal Reserve Bank and the California Department of Business Oversight (“CDBO”), as an integral part of their regulatory oversight, periodically review the adequacy of our ALLL. These agencies may require us to make additional provisions for perceived potential loan losses, over and above the provisions that we have already made, the effect of which would be to reduce our income or increase any losses we might incur.
We recorded
no
provision for loan and lease losses during either the
year
ended
December 31, 2018
or
December 31, 2017
primarily as a result of reserves for new loan growth being offset by a decline in the level of classified assets. We recorded a $19.9 million provision for loan and lease losses for the year ended December 31, 2016 primarily as a result of new loan growth and downgrades and charge offs on loans that exceeded recoveries. Approximately 60%, or $12.0 million, of the $19.9 million provision for loan and lease losses was attributable to the full charge-off of one large shared national credit.
See "—
Financial Condition—Nonperforming Loans and the Allowance for Loan and Lease Losses
" below in this Item 7 for additional information regarding the ALLL.
Noninterest Income
The following table identifies the components of and the percentage changes in noninterest income in the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Amount
|
|
Amount
|
|
Amount
|
|
Percentage
Change
|
|
Percentage
Change
|
|
2018
|
|
2017
|
|
2016
|
|
2018 vs. 2017
|
|
2017 vs. 2016
|
|
(Dollars in thousands)
|
Service fees on deposits and other banking services
|
$
|
1,549
|
|
|
$
|
1,347
|
|
|
$
|
1,093
|
|
|
15.0
|
%
|
|
23.2
|
%
|
Net gain (loss) on sale of securities available for sale
|
48
|
|
|
(4
|
)
|
|
—
|
|
|
(1,300.0
|
)%
|
|
(100.0
|
)%
|
Net loss on sale of other assets
|
(4
|
)
|
|
(37
|
)
|
|
(527
|
)
|
|
(89.2
|
)%
|
|
(93.0
|
)%
|
Net gain on sale of small business administration loans
|
—
|
|
|
—
|
|
|
40
|
|
|
—
|
%
|
|
(100.0
|
)%
|
Other noninterest income
|
3,042
|
|
|
3,068
|
|
|
2,331
|
|
|
(0.8
|
)%
|
|
31.6
|
%
|
Total noninterest income
|
$
|
4,635
|
|
|
$
|
4,374
|
|
|
$
|
2,937
|
|
|
6.0
|
%
|
|
48.9
|
%
|
2018
vs.
2017
.
Noninterest income
increased
$261 thousand
, or
6.0%
, for the
year
ended
December 31, 2018
as compared to the
year
ended
December 31, 2017
, primarily as a result of:
|
|
•
|
An increase in loan servicing and referral fees during the
year
ended
December 31, 2018
as compared to the same period in
2017
; and
|
|
|
•
|
An increase
of
$52 thousand
in gain on the sale of securities available-for-sale during the year ended December 31, 2018 as compared to the same period in 2017; partially offset by
|
|
|
•
|
A decrease in other noninterest income attributable to recoveries of fees on previously charged off loans during the second quarter of 2017 for which a similar level of recoveries did not occur during the year ended December 31, 2018.
|
2017
vs.
2016
.
During the year ended
December 31, 2017
, noninterest income
increased
by
$1.4 million
, or
48.9%
, to
$4.4 million
from
$2.9 million
for the year ended
December 31, 2016
, primarily as a result of:
|
|
•
|
An increase in loan servicing and referral fees during the year ended December 31, 2017 as compared to the same period in 2016; and
|
|
|
•
|
A loss of $37 thousand on the sale of other assets during the year ended December 31, 2017 as compared to a loss of $527 thousand during the same period in 2016; partially offset by
|
|
|
•
|
A decrease of $40 thousand in net on sale of small business administration (“SBA”) loans for the year ended December 31, 2017 as compared to the same period in 2017.
|
Noninterest Expense
The following table sets forth the principal components and the amounts of, and the percentage changes in, noninterest expense in the years ended
December 31, 2018
,
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2018 vs. 2017
|
|
2017 vs. 2016
|
|
Amount
|
|
Amount
|
|
Amount
|
|
Percent Change
|
|
Percent Change
|
|
(Dollars in thousands)
|
Salaries and employee benefits
|
$
|
23,749
|
|
|
$
|
22,977
|
|
|
$
|
21,817
|
|
|
3.4
|
%
|
|
5.3
|
%
|
Occupancy
|
2,388
|
|
|
2,605
|
|
|
3,061
|
|
|
(8.3
|
)%
|
|
(14.9
|
)%
|
Equipment and depreciation
|
1,802
|
|
|
1,687
|
|
|
1,802
|
|
|
6.8
|
%
|
|
(6.4
|
)%
|
Data processing
|
1,681
|
|
|
1,479
|
|
|
1,271
|
|
|
13.7
|
%
|
|
16.4
|
%
|
FDIC expense
|
927
|
|
|
1,073
|
|
|
950
|
|
|
(13.6
|
)%
|
|
12.9
|
%
|
Other real estate owned expense, net
|
123
|
|
|
—
|
|
|
(70
|
)
|
|
100.0
|
%
|
|
(100.0
|
)%
|
Professional fees
|
2,468
|
|
|
4,215
|
|
|
4,046
|
|
|
(41.4
|
)%
|
|
4.2
|
%
|
Business development
|
946
|
|
|
729
|
|
|
795
|
|
|
29.8
|
%
|
|
(8.3
|
)%
|
Loan related expense
|
769
|
|
|
456
|
|
|
375
|
|
|
68.6
|
%
|
|
21.6
|
%
|
Insurance
|
248
|
|
|
221
|
|
|
291
|
|
|
12.2
|
%
|
|
(24.1
|
)%
|
Other operating expenses
(1)
|
1,869
|
|
|
2,316
|
|
|
2,063
|
|
|
(19.3
|
)%
|
|
12.3
|
%
|
Total noninterest expense
|
$
|
36,970
|
|
|
$
|
37,758
|
|
|
$
|
36,401
|
|
|
(2.1
|
)%
|
|
3.7
|
%
|
|
|
(1)
|
Other operating expenses primarily consist of telephone, investor relations, promotional, regulatory expenses, and correspondent bank fees.
|
2018
vs.
2017
.
Noninterest expense
decreased
$788 thousand
, or
2.1%
, for the
year
ended
December 31, 2018
as compared to the
year
ended
December 31, 2017
, primarily as a result of:
|
|
•
|
A decrease of
$1.7 million
in our professional fees primarily related to lower legal fees in the first quarter of 2018, the recovery of legal fees attributable to the payoff of a loan relationship in the second quarter of 2018 that was previously on nonaccrual status and the recovery of legal fees in the third quarter of 2018 related to a loan relationship that was fully charged off in previous years; partially offset by
|
|
|
•
|
An increase of
$772 thousand
in salaries and employee benefits primarily related to an increase in employee compensation expense;
|
|
|
•
|
An increase of $123 thousand in other real estate owned expense during the year ended December 31, 2018 as compared to the same period in 2017; and
|
|
|
•
|
An increase in various expense accounts related to the normal course of operating, including expenses related to loan production and business development during the year ended December 31, 2018 as compared to the year ended December 31, 2017.
|
2017
vs.
2016
.
During the year ended
December 31, 2017
, noninterest expense increased by
$1.4 million
, or
3.7%
, to
$37.8 million
from
$36.4 million
for the year ended
December 31, 2016
, primarily as a result of:
|
|
•
|
An increase of $1.2 million in salaries and employee benefits primarily related to our incentive compensation accrual for the year ended December 31, 2017 and the reversal of our incentive compensation accrual during the fourth quarter of 2016 due to the losses experienced in 2016; and
|
|
|
•
|
An increase of $169 thousand in our professional fees attributable to an increase in accounting and legal fees during the year ended December 31, 2017.
|
Provision for (Benefit from) Income Tax
During the year ended
December 31, 2018
, we had an income tax benefit of
$10.8 million
. The income tax benefit during the year ended December 31, 2018 is as a result of our net income during the year and the release of our full valuation allowance of $11.1 million on our net deferred tax asset during the second quarter of 2018, discussed further below. Accounting rules specify that management must evaluate the deferred tax asset on a recurring basis to determine whether enough positive evidence exists to determine whether it is more-likely-than-not that the deferred tax asset will be available to offset or reduce future taxes. The tax code allows net operating losses incurred prior to December 31, 2017 to be carried forward for 20 years from the date of the loss, and based on its evaluation, management believes that the Company will be able to realize the deferred tax asset within the period that our net operating losses may be carried forward. Due to the hierarchy of evidence that the accounting rules specify, management determined that there continued to be enough positive evidence to support no valuation allowance on our deferred tax asset at
December 31, 2018
. Significant positive evidence included our three-year cumulative income position, continued improvement in asset quality, and the expectation that we will continue to have positive earnings based on nine trailing quarters
of positive income and our forecast. Negative evidence included our accumulated deficit. Due to the hierarchy of evidence that the accounting rules specify, management determined that there continued to be enough positive evidence to support no valuation allowance on our deferred tax asset at
December 31, 2018
.
During the year ended
December 31, 2017
, we had an income tax benefit of
$91 thousand
. The income tax benefit for the year ended December 31, 2017 represents the reclassification of the alternative minimum tax credit carryforward from a deferred tax asset to an income tax receivable as required by the Tax Cuts and Jobs Act signed into law on December 22, 2017. This was partially offset by the payment to the State of California for the cost of doing business within the state. No additional income tax expense was recorded as a result of our full valuation allowance, discussed further below. The year ended December 31, 2017 results reflect the estimated impact of the enactment of the new tax law, which resulted in a minimal increase in net income due to the elimination of the corporate alternative minimum tax. Additionally, as part of the newly enacted tax law, the decrease in our deferred tax asset and corresponding valuation allowance as of December 31, 2017 is primarily attributable to the Federal corporate tax rate decreasing from 35% to 21%, which caused us to decrease our gross deferred tax asset and the related valuation allowance to
$15.9 million
from
$21.7 million
as of September 30, 2017. Accounting rules specify that management must evaluate the deferred tax asset on a recurring basis to determine whether enough positive evidence exists to determine whether it is more-likely-than-not that the deferred tax asset will be available to offset or reduce future taxes. The tax code allows net operating losses to be carried forward for 20 years from the date of the loss, and while management believes that the Company will be able to realize the deferred tax asset within the period that our net operating losses may be carried forward, we are unable to assert the timing as to when that realization will occur. Due to the hierarchy of evidence that the accounting rules specify, management determined that a full valuation allowance that was previously established on the balance of our deferred tax asset was still required at December 31, 2017.
During the year ended
December 31, 2016
, we had income tax expense of
$16.8 million
as a result of the establishment of a full valuation allowance during 2016 on the balance of our deferred tax asset, which includes current and historical losses that may be used to offset taxes on future profits. Accounting rules specify that management must evaluate the deferred tax asset on a recurring basis to determine whether enough positive evidence exists to determine whether it is more-likely-than-not that the deferred tax asset will be available to offset or reduce future taxes. Negative evidence included the significant losses incurred during the second and third quarters of 2016, an increase in our nonperforming assets from December 31, 2015, and our accumulated deficit. Positive evidence included our forecast of our taxable income, the time period in which we have to utilize our deferred tax asset and the current economic conditions. The tax code allows net operating losses to be carried forward for 20 years from the date of the loss, and while management believed that the Company would be able to realize the deferred tax asset within that period, we were unable to assert the timing as to when that realization would occur. As a result of this conclusion and due to the hierarchy of evidence that the accounting rules specify, a valuation allowance had been recorded as of December 31, 2016 to offset the deferred tax asset.
See "–
Critical Accounting Policies -
Utilization and Valuation of Deferred Income Tax Benefits
” below for additional information regarding our deferred tax asset.
Financial Condition
Assets
Our total consolidated assets increased by
$27 million
at
December 31, 2018
from
$1.3 billion
at
December 31, 2017
. The following table sets forth the composition of our interest earning assets at:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
(Dollars in thousands)
|
Interest-bearing deposits with financial institutions
(1)
|
$
|
174,468
|
|
|
$
|
186,010
|
|
Interest-bearing time deposits with financial institutions
|
2,420
|
|
|
2,920
|
|
Federal Reserve Bank of San Francisco and Federal Home Loan Bank Stock, at cost
|
8,822
|
|
|
8,107
|
|
Securities available for sale, at fair value
|
31,231
|
|
|
39,738
|
|
Loans (net of allowances of $13,506 and $14,196, respectively)
|
1,083,240
|
|
|
1,053,201
|
|
|
|
(1)
|
Includes interest-earning balances maintained at the Federal Reserve Bank of San Francisco (“FRBSF”).
|
Securities Available for Sale
Securities Available for Sale
. Securities that we intend to hold for an indefinite period of time, but which may be sold in response to changes in liquidity needs, interest rates, or prepayment risks or other similar factors, are classified as “securities
available for sale”. Such securities are recorded on our balance sheet at their respective fair values and increases or decreases in those values are recorded as unrealized gains or losses, respectively, and are reported as Other Comprehensive Income (Loss) on our accompanying consolidated balance sheet, rather than included in or deducted from our earnings.
The following is a summary of the major components of securities available for sale and a comparison of the amortized cost, estimated fair values and the gross unrealized gains and losses attributable to those securities, as of
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Amortized Cost
|
|
Gross
Unrealized Gain
|
|
Gross
Unrealized Loss
|
|
Estimated
Fair Value
|
Securities available for sale at December 31, 2018:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
2,999
|
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
|
$
|
2,980
|
|
Residential mortgage backed securities issued by U.S. Agencies
|
24,739
|
|
|
1
|
|
|
(1,023
|
)
|
|
23,717
|
|
Commercial mortgage backed securities issued by U.S. Agencies
|
4,495
|
|
|
40
|
|
|
(1
|
)
|
|
4,534
|
|
Total securities available for sale
|
$
|
32,233
|
|
|
$
|
41
|
|
|
$
|
(1,043
|
)
|
|
$
|
31,231
|
|
Securities available for sale at December 31, 2017:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
2,996
|
|
|
$
|
—
|
|
|
$
|
(25
|
)
|
|
$
|
2,971
|
|
Residential mortgage backed securities issued by U.S. Agencies
|
30,894
|
|
|
5
|
|
|
(777
|
)
|
|
30,122
|
|
Asset backed security
|
1,992
|
|
|
—
|
|
|
(251
|
)
|
|
1,741
|
|
Mutual funds
|
5,000
|
|
|
11
|
|
|
(107
|
)
|
|
4,904
|
|
Total securities available for sale
|
$
|
40,882
|
|
|
$
|
16
|
|
|
$
|
(1,160
|
)
|
|
$
|
39,738
|
|
Securities available for sale at December 31, 2016:
|
|
|
|
|
|
|
|
Residential mortgage backed securities issued by U.S. Agencies
|
$
|
37,813
|
|
|
$
|
6
|
|
|
$
|
(1,144
|
)
|
|
$
|
36,675
|
|
Residential collateralized mortgage obligations issued by non agencies
|
484
|
|
|
—
|
|
|
(16
|
)
|
|
468
|
|
Asset backed security
|
2,025
|
|
|
—
|
|
|
(592
|
)
|
|
1,433
|
|
Mutual funds
|
5,000
|
|
|
11
|
|
|
(107
|
)
|
|
4,904
|
|
Total securities available for sale
|
$
|
45,322
|
|
|
$
|
17
|
|
|
$
|
(1,859
|
)
|
|
$
|
43,480
|
|
At
December 31, 2018
,
2017
and
2016
, U.S. agency mortgage backed securities and collateralized mortgage obligations with an aggregate fair market value of
$18.2 million
,
$22.7 million
and
$21.1 million
, respectively, were pledged to secure FHLB borrowings, repurchase agreements, local agency deposits and treasury, tax and loan accounts.
The amortized cost of securities available for sale at
December 31, 2018
is shown in the table below by contractual maturities taking into consideration historical prepayments based on the prior twelve months of principal payments. Expected maturities will differ from contractual maturities and historical prepayments, particularly with respect to collateralized mortgage obligations, primarily because prepayment rates are affected by changes in conditions in the interest rate market and, therefore, future prepayment rates may differ from historical prepayment rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
Maturing in
|
|
One year
or less
|
|
Over one
year through
five years
|
|
Over five
years through
ten years
|
|
Over ten
years
|
|
Total
|
(Dollars in thousands)
|
Amortized Cost
|
|
Weighted
Average
Yield
|
|
Amortized Cost
|
|
Weighted
Average
Yield
|
|
Amortized Cost
|
|
Weighted
Average
Yield
|
|
Amortized Cost
|
|
Weighted
Average
Yield
|
|
Amortized Cost
|
|
Weighted
Average
Yield
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
2,999
|
|
|
1.30
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
2,999
|
|
|
1.30
|
%
|
Residential mortgage backed securities issued by U.S. Agencies
|
4,746
|
|
|
1.51
|
%
|
|
12,932
|
|
|
1.56
|
%
|
|
6,808
|
|
|
1.67
|
%
|
|
253
|
|
|
2.93
|
%
|
|
24,739
|
|
|
1.60
|
%
|
Commercial mortgage backed securities issued by U.S. Agencies
|
129
|
|
|
3.16
|
%
|
|
534
|
|
|
3.13
|
%
|
|
3,163
|
|
|
3.39
|
%
|
|
669
|
|
|
3.20
|
%
|
|
4,495
|
|
|
3.32
|
%
|
Total Securities Available for sale
|
$
|
7,874
|
|
|
1.46
|
%
|
|
$
|
13,466
|
|
|
1.62
|
%
|
|
$
|
9,971
|
|
|
2.22
|
%
|
|
$
|
922
|
|
|
3.13
|
%
|
|
$
|
32,233
|
|
|
1.81
|
%
|
The table below indicates, as of
December 31, 2018
, the gross unrealized losses and fair values of our investments, aggregated by investment category, and length of time that the individual securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with Unrealized Loss at December 31, 2018
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
(Dollars in thousands)
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
U.S. Treasury securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,980
|
|
|
$
|
(19
|
)
|
|
$
|
2,980
|
|
|
$
|
(19
|
)
|
Residential mortgage backed securities issued by U.S. Agencies
|
361
|
|
|
(3
|
)
|
|
23,299
|
|
|
(1,020
|
)
|
|
23,660
|
|
|
(1,023
|
)
|
Commercial mortgage backed securities issued by U.S. Agencies
|
999
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
999
|
|
|
(1
|
)
|
Total
|
$
|
1,360
|
|
|
$
|
(4
|
)
|
|
$
|
26,279
|
|
|
$
|
(1,039
|
)
|
|
$
|
27,639
|
|
|
$
|
(1,043
|
)
|
We regularly monitor investments for significant declines in fair value. We have determined that declines in the fair values of these investments below their respective amortized costs, as set forth in the tables above, are temporary because (i) those declines were due to interest rate changes and not to a deterioration in the creditworthiness of the issuers of those investment securities, and (ii) we have the ability to hold those securities until there is a recovery in their values or until their maturity.
Loans
The following table sets forth the composition, by loan category, of our loan portfolio at
December 31, 2018
,
2017
,
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
(Dollars in thousands)
|
Commercial loans
|
$
|
444,441
|
|
|
40.6
|
%
|
|
$
|
394,493
|
|
|
37.1
|
%
|
|
$
|
333,376
|
|
|
35.2
|
%
|
|
$
|
347,300
|
|
|
40.3
|
%
|
|
$
|
301,746
|
|
|
36.0
|
%
|
Commercial real estate loans – owner occupied
|
211,645
|
|
|
19.3
|
%
|
|
214,365
|
|
|
20.1
|
%
|
|
214,420
|
|
|
22.7
|
%
|
|
195,554
|
|
|
22.7
|
%
|
|
212,515
|
|
|
25.4
|
%
|
Commercial real estate loans – all other
|
226,441
|
|
|
20.7
|
%
|
|
228,090
|
|
|
21.4
|
%
|
|
173,223
|
|
|
18.3
|
%
|
|
146,641
|
|
|
17.0
|
%
|
|
146,676
|
|
|
17.5
|
%
|
Residential mortgage loans – multi-family
|
97,173
|
|
|
8.9
|
%
|
|
114,302
|
|
|
10.7
|
%
|
|
130,930
|
|
|
13.8
|
%
|
|
81,487
|
|
|
9.5
|
%
|
|
95,276
|
|
|
11.4
|
%
|
Residential mortgage loans – single family
|
21,176
|
|
|
1.9
|
%
|
|
24,848
|
|
|
2.3
|
%
|
|
34,527
|
|
|
3.6
|
%
|
|
52,072
|
|
|
6.0
|
%
|
|
64,326
|
|
|
7.7
|
%
|
Construction and land development loans
|
38,496
|
|
|
3.5
|
%
|
|
34,614
|
|
|
3.3
|
%
|
|
18,485
|
|
|
2.0
|
%
|
|
10,001
|
|
|
1.2
|
%
|
|
7,745
|
|
|
0.9
|
%
|
Consumer loans
|
54,514
|
|
|
5.0
|
%
|
|
53,918
|
|
|
5.1
|
%
|
|
41,563
|
|
|
4.4
|
%
|
|
28,663
|
|
|
3.3
|
%
|
|
9,687
|
|
|
1.2
|
%
|
Total loans
|
1,093,886
|
|
|
100.0
|
%
|
|
1,064,630
|
|
|
100.0
|
%
|
|
946,524
|
|
|
100.0
|
%
|
|
861,718
|
|
|
100.0
|
%
|
|
837,971
|
|
|
100.0
|
%
|
Deferred fee (income) costs, net
|
2,860
|
|
|
|
|
2,767
|
|
|
|
|
1,802
|
|
|
|
|
731
|
|
|
|
|
59
|
|
|
|
Allowance for loan and lease losses
|
(13,506
|
)
|
|
|
|
(14,196
|
)
|
|
|
|
(16,801
|
)
|
|
|
|
(12,716
|
)
|
|
|
|
(13,833
|
)
|
|
|
Loans, net
|
$
|
1,083,240
|
|
|
|
|
$
|
1,053,201
|
|
|
|
|
$
|
931,525
|
|
|
|
|
$
|
849,733
|
|
|
|
|
$
|
824,197
|
|
|
|
Commercial loans are loans to businesses to finance capital purchases or improvements, or to provide cash flow for operations. Real estate and residential mortgage loans are loans secured by trust deeds on real properties, including commercial properties and single family and multi-family residences. Construction loans are interim loans to finance specific construction projects. Land development loans are loans secured by non-arable bare land. Consumer loans include installment loans to consumers.
The following table sets forth the maturity distribution of our loan portfolio (excluding single and multi-family residential mortgage loans and consumer loans) at
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
One Year
or Less
|
|
Over One
Year
Through
Five Years
|
|
Over Five
Years
|
|
Total
|
|
(Dollars in thousands)
|
Real estate loans
(1)
|
|
|
|
|
|
|
|
Floating rate
|
$
|
68,210
|
|
|
$
|
26,877
|
|
|
$
|
123,678
|
|
|
$
|
218,765
|
|
Fixed rate
|
3,406
|
|
|
70,542
|
|
|
183,869
|
|
|
257,817
|
|
Commercial loans
|
|
|
|
|
|
|
|
Floating rate
|
128,513
|
|
|
184,719
|
|
|
34,042
|
|
|
347,274
|
|
Fixed rate
|
21,933
|
|
|
38,702
|
|
|
36,532
|
|
|
97,167
|
|
Total
|
$
|
222,062
|
|
|
$
|
320,840
|
|
|
$
|
378,121
|
|
|
$
|
921,023
|
|
|
|
(1)
|
Does not include mortgage loans on single or multi-family residences or consumer loans, which totaled
$118.3 million
and
$54.5 million
, respectively, at
December 31, 2018
.
|
Nonperforming Assets and Allowance for Loan and Lease Losses
Nonperforming Assets
. Non-performing loans consist of (i) loans on non-accrual status which are loans on which the accrual of interest has been discontinued and include restructured loans when there has not been a history of past performance on debt service in accordance with the contractual terms of the restructured loans, and (ii) loans 90 days or more past due and still accruing interest. Non-performing assets are comprised of non-performing loans and OREO, which consists of real properties which we have acquired by or in lieu of foreclosure and which we intend to offer for sale.
Loans are placed on non-accrual status when, in our opinion, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and the loan is in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances involved in that loan’s delinquency. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of unpaid amounts on such a loan are applied to reduce principal when received, except when the ultimate collectability of principal is probable, in which case such payments are applied to interest and are credited to income. Non-accrual loans may be restored to accrual status if and when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans which, based on our non-accrual policy, do not require non-accrual treatment.
The following table sets forth information regarding our nonperforming assets, as well as information regarding restructured loans, at
December 31, 2018
,
2017
,
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018
|
|
At December 31, 2017
|
|
At December 31, 2016
|
|
At December 31, 2015
|
|
At December 31, 2014
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
$
|
3,352
|
|
|
$
|
3,222
|
|
|
$
|
20,330
|
|
|
$
|
12,284
|
|
|
$
|
16,182
|
|
Commercial real estate
|
831
|
|
|
2,461
|
|
|
4,346
|
|
|
10,083
|
|
|
4,288
|
|
Residential real estate
|
—
|
|
|
171
|
|
|
221
|
|
|
1,148
|
|
|
1,472
|
|
Construction and land development
|
—
|
|
|
—
|
|
|
—
|
|
|
1,618
|
|
|
2,111
|
|
Consumer
|
43
|
|
|
56
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total nonaccrual loans
|
$
|
4,226
|
|
|
$
|
5,910
|
|
|
$
|
24,897
|
|
|
$
|
25,133
|
|
|
$
|
24,053
|
|
Loans past due 90 days and still accruing interest:
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
$
|
1,278
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total loans past due 90 days and still accruing interest
(1)
|
$
|
1,278
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other real estate owned (OREO):
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
$
|
1,173
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Residential real estate
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
650
|
|
|
962
|
|
Construction and land development
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
630
|
|
Total other real estate owned
|
$
|
1,173
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
650
|
|
|
$
|
1,592
|
|
Other nonperforming assets:
|
|
|
|
|
|
|
|
|
|
Other foreclosed assets
|
91
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total nonperforming assets
(2)
|
$
|
5,490
|
|
|
$
|
5,946
|
|
|
$
|
24,897
|
|
|
$
|
25,783
|
|
|
$
|
25,645
|
|
Restructured loans:
|
|
|
|
|
|
|
|
|
|
Accruing loans
|
$
|
—
|
|
|
$
|
450
|
|
|
$
|
—
|
|
|
$
|
724
|
|
|
$
|
11,084
|
|
Nonaccruing loans (included in nonaccrual loans above)
|
—
|
|
|
809
|
|
|
8,931
|
|
|
20,070
|
|
|
5,935
|
|
Total restructured loans
|
$
|
—
|
|
|
$
|
1,259
|
|
|
$
|
8,931
|
|
|
$
|
20,794
|
|
|
$
|
17,019
|
|
|
|
(1)
|
This amount represents one loan relationship. Subsequent to December 31, 2018, this balance was paid off.
|
|
|
(2)
|
Excludes loans past due 90 days and still accruing interest.
|
As the above table indicates, total nonperforming assets decreased by approximately $456 thousand, or 7.7%, to
$5.5 million
as of
December 31, 2018
from
$5.9 million
as of
December 31, 2017
. The increase in our non-performing loans resulted primarily from $3.1 million of payoffs or paydowns on our nonaccrual loans, the transfer to OREO of $1.3 million, the transfer to other assets of $91 thousand, $814 thousand of loans that returned to accrual status and charge-offs of $1.6 million during the year ended December 31, 2018, partially offset by additions totaling $5.3 million during the same period. The increase in our OREO owned balance from December 31, 2017 related to the foreclosure of two residential properties securing a commercial loan during the year ended December 31, 2018, partially offset by the sale of one of the two properties during the year ended December 31, 2018 for a gain on sale of $29 thousand. The increase in our other foreclosed assets balance from December 31,
2017 related to the addition of three automobiles for $91 thousand, partially offset by the sale of an automobile for $36 thousand during the year ended December 31, 2018.
Information Regarding Impaired Loans
. At
December 31, 2018
, loans deemed impaired totaled
$4.2 million
as compared to
$6.4 million
at
December 31, 2017
. We had an average investment in impaired loans of
$5.7 million
for the
year
ended
December 31, 2018
as compared to
$16.4 million
for the year ended
December 31, 2017
. The interest that would have been earned during the
year
ended
December 31, 2018
had the nonaccruing impaired loans remained current in accordance with their original terms was approximately
$362 thousand
.
The following table sets forth the amount of impaired loans to which a portion of the ALLL has been specifically allocated, and the aggregate amount so allocated, in accordance with ASC 310-10, and the amount of the ALLL and the amount of impaired loans for which no such allocations were made, in each case at
December 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Loans
|
|
Reserves for
Loan Losses
|
|
% of
Reserves to
Loans
|
|
Loans
|
|
Reserves for
Loan Losses
|
|
% of
Reserves to
Loans
|
|
(Dollars in thousands)
|
Impaired loans with specific reserves
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
450
|
|
|
$
|
7
|
|
|
1.6
|
%
|
Impaired loans without specific reserves
|
4,226
|
|
|
—
|
|
|
—
|
|
|
5,910
|
|
|
—
|
|
|
—
|
|
Total impaired loans
|
$
|
4,226
|
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
6,360
|
|
|
$
|
7
|
|
|
0.1
|
%
|
The
$2.1 million
decrease
in impaired loans to
$4.2 million
at
December 31, 2018
from
$6.4 million
at
December 31, 2017
was primarily attributable to $3.2 million in principal payments, $678 thousand transferred to performing loans, $1.4 million transferred to OREO, $76 thousand transferred to other assets and $2.8 million charged-off during the
year
ended
December 31, 2018
partially offset by additions of $6.0 million to impaired loans during the same period. Based on an internal analysis, using the current estimated fair values of the collateral or the discounted present values of the future estimated cash flows of the impaired loans, we concluded that, at
December 31, 2018
,
no
specific reserves were required on our impaired loans and that all impaired loans were well secured and adequately collateralized with no specific reserves required.
Allowance for Loan and Lease Losses
. The ALLL totaled
$13.5 million
, representing
1.23%
of loans outstanding, at
December 31, 2018
, as compared to
$14.2 million
, or
1.33%
of loans outstanding, at
December 31, 2017
.
The adequacy of the ALLL is determined through periodic evaluations of the loan portfolio and other factors that can reasonably be expected to affect the ability of borrowers to meet their loan obligations. Those factors are inherently subjective as the process for determining the adequacy of the ALLL involves some significant estimates and assumptions about such matters such as (i) economic conditions and trends and the amounts and timing of expected future cash flows of borrowers which can affect their ability to meet their loan obligations to us, (ii) the fair value of the collateral securing non-performing loans, (iii) estimates of losses that we may incur on non-performing loans, which are determined on the basis of historical loss experience and industry loss factors and bank regulatory guidelines, which are subject to change, and (iv) various qualitative factors. Since those factors are subject to changes in economic and other conditions and changes in regulatory guidelines or other circumstances over which we have no control, the amount of the ALLL may prove to be insufficient to cover all of the loan losses we might incur in the future. In such an event, it may become necessary for us to increase the ALLL from time to time to maintain its adequacy. Such increases are effectuated by means of a charge to income, referred to as the “provision for loan and lease losses”, in our statements of our operations. See “—
Results of Operations
—
Provision for Loan and Lease Losses
, above in this Item 7.
The amount of the ALLL is first determined by assigning reserve ratios for all loans. All non-accrual loans and other loans classified as “Special Mention,” “Substandard” or “Doubtful” (“classified loans” or “classification categories”) and not fully collateralized are then assigned specific reserves within the ALLL, with greater reserve allocations made to loans deemed to be of a higher risk. These ratios are determined based on prior loss history and industry guidelines and loss factors, by type of loan, adjusted for current economic factors and current economic trends. Refer to Note 5, Loans and Allowance for Loan and Lease Losses for definitions related to our credit quality indicators stated above.
On a quarterly basis, we utilize a classification based loan loss migration model as well as review individual loans in determining the adequacy of the ALLL. Our loss migration analysis tracks a certain number of quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans (automobile, mortgage and credit cards), which are analyzed as homogeneous loan pools. These calculated loss factors are then applied to outstanding loan balances. We analyze impaired loans individually.
In determining whether and the extent to which we will make adjustments to our loan loss migration model for purposes of determining the ALLL, we also consider a number of qualitative factors that can affect the performance and the collectability of the loans in our loan portfolio. Such qualitative factors include:
|
|
•
|
The effects of changes that we may make in our loan policies or underwriting standards on the quality of the loans and the risks in our loan portfolios;
|
|
|
•
|
Trends and changes in local, regional and national economic conditions, as well as changes in industry specific conditions, and any other reasonably foreseeable events that could affect the performance or the collectability of the loans in our loan portfolios;
|
|
|
•
|
Material changes that may occur in the mix or in the volume of the loans in our loan portfolios that could alter, whether positively or negatively, the risk profile of those portfolios;
|
|
|
•
|
Changes in management or loan personnel or other circumstances that could, either positively or negatively, impact the application of our loan underwriting standards, the monitoring of nonperforming loans or our loan collection efforts; and
|
|
|
•
|
External factors that, in addition to economic conditions, can affect the ability of borrowers to meet their loan obligations, such as fires, earthquakes and terrorist attacks.
|
Determining the effects that these qualitative factors may have on the performance of each category of loans in our loan portfolio requires numerous judgments, assumptions and estimates about conditions, trends and events which may subsequently prove to have been incorrect due to circumstances outside of our control. Moreover, the effects of qualitative factors such as these on the performance of our loan portfolios are often difficult to quantify. As a result, we may sustain loan losses in any particular period that are sizable in relation to the ALLL or that may even exceed the ALLL.
Set forth below is information regarding loan balances and the related ALLL, by portfolio type, for the years ended
December 31, 2018
,
2017
, 2016, 2015 and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Commercial
|
|
Real Estate
|
|
Construction and Land
Development
|
|
Consumer and
Single Family
Mortgages
|
|
Unallocated
|
|
Total
|
ALLL for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
9,155
|
|
|
$
|
2,906
|
|
|
$
|
650
|
|
|
$
|
1,043
|
|
|
$
|
442
|
|
|
$
|
14,196
|
|
Charge offs
|
(2,757
|
)
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
(2,765
|
)
|
Recoveries
|
1,959
|
|
|
69
|
|
|
—
|
|
|
47
|
|
|
—
|
|
|
2,075
|
|
Provision
|
(286
|
)
|
|
668
|
|
|
(224
|
)
|
|
208
|
|
|
(366
|
)
|
|
—
|
|
Balance at end of year
|
$
|
8,071
|
|
|
$
|
3,643
|
|
|
$
|
426
|
|
|
$
|
1,290
|
|
|
$
|
76
|
|
|
$
|
13,506
|
|
Allowance for loan and lease losses as a percentage of average total loans
|
|
|
|
|
|
|
|
|
|
|
1.26
|
%
|
Allowance for loan and lease losses as a percentage of total outstanding loans
|
|
|
|
|
|
|
|
|
|
|
1.23
|
%
|
Ratio of net charge-offs to average loans outstanding during the period
|
|
|
|
|
|
|
|
|
|
|
0.06
|
%
|
ALLL for the year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
11,276
|
|
|
$
|
4,226
|
|
|
$
|
343
|
|
|
$
|
642
|
|
|
$
|
314
|
|
|
$
|
16,801
|
|
Charge offs
|
(4,124
|
)
|
|
(432
|
)
|
|
—
|
|
|
(179
|
)
|
|
—
|
|
|
(4,735
|
)
|
Recoveries
|
1,852
|
|
|
72
|
|
|
27
|
|
|
179
|
|
|
—
|
|
|
2,130
|
|
Provision
|
151
|
|
|
(960
|
)
|
|
280
|
|
|
401
|
|
|
128
|
|
|
—
|
|
Balance at end of year
|
$
|
9,155
|
|
|
$
|
2,906
|
|
|
$
|
650
|
|
|
$
|
1,043
|
|
|
$
|
442
|
|
|
$
|
14,196
|
|
Allowance for loan and lease losses as a percentage of average total loans
|
|
|
|
|
|
|
|
|
|
|
1.42
|
%
|
Allowance for loan and lease losses as a percentage of total outstanding loans
|
|
|
|
|
|
|
|
|
|
|
1.33
|
%
|
Ratio of net charge-offs to average loans outstanding during the period
|
|
|
|
|
|
|
|
|
|
|
0.26
|
%
|
ALLL for the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
6,639
|
|
|
$
|
5,109
|
|
|
$
|
282
|
|
|
$
|
686
|
|
|
$
|
—
|
|
|
$
|
12,716
|
|
Charge offs
|
(15,390
|
)
|
|
(1,119
|
)
|
|
—
|
|
|
(540
|
)
|
|
—
|
|
|
(17,049
|
)
|
Recoveries
|
1,189
|
|
|
1
|
|
|
57
|
|
|
17
|
|
|
—
|
|
|
1,264
|
|
Provision
|
18,838
|
|
|
235
|
|
|
4
|
|
|
479
|
|
|
314
|
|
|
19,870
|
|
Balance at end of year
|
$
|
11,276
|
|
|
$
|
4,226
|
|
|
$
|
343
|
|
|
$
|
642
|
|
|
$
|
314
|
|
|
$
|
16,801
|
|
Allowance for loan and lease losses as a percentage of average total loans
|
|
|
|
|
|
|
|
|
|
|
1.96
|
%
|
Allowance for loan and lease losses as a percentage of total outstanding loans
|
|
|
|
|
|
|
|
|
|
|
1.78
|
%
|
Ratio of net charge-offs to average loans outstanding during the period
|
|
|
|
|
|
|
|
|
|
|
1.84
|
%
|
ALLL for the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
7,670
|
|
|
$
|
5,133
|
|
|
$
|
296
|
|
|
$
|
734
|
|
|
$
|
—
|
|
|
$
|
13,833
|
|
Charge offs
|
(2,643
|
)
|
|
—
|
|
|
(85
|
)
|
|
(199
|
)
|
|
—
|
|
|
(2,927
|
)
|
Recoveries
|
1,798
|
|
|
4
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
1,810
|
|
Provision
|
(186
|
)
|
|
(28
|
)
|
|
71
|
|
|
143
|
|
|
—
|
|
|
—
|
|
Balance at end of year
|
$
|
6,639
|
|
|
$
|
5,109
|
|
|
$
|
282
|
|
|
$
|
686
|
|
|
$
|
—
|
|
|
$
|
12,716
|
|
Allowance for loan and lease losses as a percentage of average total loans
|
|
|
|
|
|
|
|
|
|
|
1.54
|
%
|
Allowance for loan and lease losses as a percentage of total outstanding loans
|
|
|
|
|
|
|
|
|
|
|
1.48
|
%
|
Ratio of net charge-offs to average loans outstanding during the period
|
|
|
|
|
|
|
|
|
|
|
0.13
|
%
|
ALLL for the year ended December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
5,812
|
|
|
$
|
4,517
|
|
|
$
|
165
|
|
|
$
|
864
|
|
|
$
|
—
|
|
|
$
|
11,358
|
|
Charge offs
|
(551
|
)
|
|
—
|
|
|
—
|
|
|
(102
|
)
|
|
—
|
|
|
(653
|
)
|
Recoveries
|
1,467
|
|
|
76
|
|
|
—
|
|
|
85
|
|
|
—
|
|
|
1,628
|
|
Provision
|
942
|
|
|
540
|
|
|
131
|
|
|
(113
|
)
|
|
—
|
|
|
1,500
|
|
Balance at end of year
|
$
|
7,670
|
|
|
$
|
5,133
|
|
|
$
|
296
|
|
|
$
|
734
|
|
|
$
|
—
|
|
|
$
|
13,833
|
|
Allowance for loan and lease losses as a percentage of average total loans
|
|
|
|
|
|
|
|
|
|
|
1.73
|
%
|
Allowance for loan and lease losses as a percentage of total outstanding loans
|
|
|
|
|
|
|
|
|
|
|
1.65
|
%
|
Ratio of net charge-offs to average loans outstanding during the period
|
|
|
|
|
|
|
|
|
|
|
(0.12
|
)%
|
The ALLL
decreased
$690 thousand
from
December 31, 2017
to
December 31, 2018
primarily as a result of a decrease in our classified loan portfolio during the year ended December 31, 2018, which was partially offset by charge-offs exceeding recoveries and new loan growth during that same period. The reserve for loan losses may include an unallocated amount based upon our judgment as to possible credit losses inherent in the loan portfolio that may not have been captured by historical loss experience, qualitative factors, or specific evaluations of impaired loans. Unallocated reserves may be adjusted for factors including, but not limited to, unexpected or unusual events, volatile market and economic conditions, effects of changes or seasoning in methodologies, regulatory guidance and recommendations, or other factors that may impact borrower operating conditions and loss expectations. Management’s judgment as to unallocated reserves is determined in the context of, but separate from, the historical loss trends and qualitative factors described above. The unallocated reserve for loan losses of
$76 thousand
at
December 31, 2018
has decreased $366 thousand from the balance at
December 31, 2017
, primarily due to charge-offs during the year ended
December 31, 2018
. Management believes that the amount of unallocated reserve for loan losses is appropriate and will continue to evaluate it on an ongoing basis.
We classify our loan portfolios using asset quality ratings. The credit quality table in Note 5, Loans and Allowance for Loan and Lease Losses below in Item 8, provides a summary of loans by portfolio type and asset quality ratings as of
December 31, 2018
and
December 31, 2017
. Loans totaled approximately
$1.1 billion
at
December 31, 2018
, an
increase
of
$29.3 million
from
$1.1 billion
at
December 31, 2017
. The disaggregation of the loan portfolio by risk rating in the credit quality table located in Note 5 reflects the following changes that occurred between
December 31, 2017
and
December 31, 2018
:
|
|
•
|
Loans rated “Pass” totaled
$1.1 billion
, an
increase
of
$35.8 million
from
$1.0 billion
at
December 31, 2017
. The
increase
was primarily attributable to new loan growth and upgrades of $1.3 million and $3.2 million from “Special Mention” and “Substandard”, respectively, partially offset by the sale of $15.1 million of loans during the second quarter of 2018, downgrades to “Special Mention” and “Substandard” of $12.8 million and $1.7 million, respectively, and paydowns of principal payments.
|
|
|
•
|
Loans rated “Special Mention” totaled
$15.3 million
, a
decrease
of
$2.1 million
from
$17.4 million
at
December 31, 2017
. The
decrease
was primarily the result of $10.5 million downgraded to “Substandard”, $3.0 million of payoffs and principal payments, $1.3 million upgraded to “Pass”, and $71 thousand of loans charged-off, partially offset by $12.8 million downgraded from “Pass.”
|
|
|
•
|
Loans rated “Substandard” totaled
$6.7 million
, a
decrease
of
$4.1 million
from
$10.8 million
at
December 31, 2017
. This
decrease
was primarily the result of $10.3 million in principal payments, upgrades of $3.2 million to “Pass”, $1.2 million transferred to OREO and $1.8 million of loans charged-off; partially offset by $1.7 million and $6.0 million downgraded from “Pass” and “Special Mention”, respectively.
|
|
|
•
|
Loans rated “Doubtful” totaled
$0
, a
decrease
of
$366 thousand
from
$366 thousand
at
December 31, 2017
. This
decrease
was the result of a commercial loan of $366 thousand transferred to OREO.
|
Our loss migration analysis currently utilizes a series of nineteen staggered 16-quarter migration periods, which was increased during the second quarter of 2015 from four staggered 16-quarter migration periods in order to broaden the loss experience incorporated into the analysis. As a result, for purposes of determining applicable loss factors at
December 31, 2018
, our migration analysis covered the period from December 31, 2013 to December 31, 2017. We believe this was consistent with and reasonably reflects current economic conditions, portfolio trends and the risks that were inherent in our loan portfolio at
December 31, 2018
.
The table below sets forth loan delinquencies, by quarter, from
December 31, 2018
to
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
September 30, 2018
|
|
June 30, 2018
|
|
March 31, 2018
|
|
December 31, 2017
|
Loans Delinquent:
|
(Dollars in thousands)
|
90 days or more:
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
$
|
4,273
|
|
|
$
|
2,669
|
|
|
$
|
2,669
|
|
|
$
|
1,385
|
|
|
$
|
2,125
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential mortgages
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Land development loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,273
|
|
|
2,669
|
|
|
2,669
|
|
|
1,385
|
|
|
2,125
|
|
30-89 days:
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
3,705
|
|
|
6,357
|
|
|
6,798
|
|
|
100
|
|
|
1,387
|
|
Commercial real estate
|
831
|
|
|
4,720
|
|
|
3,870
|
|
|
1,746
|
|
|
936
|
|
Residential mortgages
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer loans
|
13
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
4,549
|
|
|
11,077
|
|
|
10,668
|
|
|
1,864
|
|
|
2,323
|
|
Total Past Due
(1)(2)
:
|
$
|
8,822
|
|
|
$
|
13,746
|
|
|
$
|
13,337
|
|
|
$
|
3,249
|
|
|
$
|
4,448
|
|
|
|
(1)
|
Past due balances include nonaccrual loans.
|
|
|
(2)
|
Subsequent to December 31, 2018, we received principal payments of $7.6 million from two loan relationships.
|
As the above table indicates, total past due loans
increased
by
$4.4 million
, or 98.3%, to
$8.8 million
at
December 31, 2018
from
$4.4 million
at
December 31, 2017
. Loans past due 90 days or more
increased
by
$2.1 million
, or 101.1%, to
$4.3 million
at
December 31, 2018
, from
$2.1 million
at
December 31, 2017
primarily resulting from $4.3 million of additions of delinquent loans, partially offset by $1.2 million transferred to OREO, $809 thousand of payoffs and $140 thousand charged off.
Loans 30-89 days past due increased by
$2.2 million
, or 95.8%, to
$4.5 million
at
December 31, 2018
from
$2.3 million
at
December 31, 2017
primarily attributable to additions of delinquent loans of $4.6 million, partially offset by $1.9 million of payoffs, $150 thousand brought current and $240 thousand that moved to 90 days or more past due.
Deposits
Average Balances of and Average Interest Rates Paid on Deposits
Set forth below are the average amounts of, and the average rates paid on, deposits for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
(Dollars in thousands)
|
Noninterest bearing demand deposits
|
$
|
348,923
|
|
|
—
|
|
|
$
|
326,105
|
|
|
—
|
|
|
$
|
299,447
|
|
|
—
|
|
Interest-bearing checking accounts
|
69,841
|
|
|
0.52
|
%
|
|
87,771
|
|
|
0.40
|
%
|
|
60,024
|
|
|
0.27
|
%
|
Money market and savings deposits
|
412,366
|
|
|
1.54
|
%
|
|
334,703
|
|
|
0.85
|
%
|
|
327,401
|
|
|
0.63
|
%
|
Time deposits
(1)
|
315,189
|
|
|
1.70
|
%
|
|
298,531
|
|
|
1.26
|
%
|
|
263,569
|
|
|
0.99
|
%
|
Total deposits
|
$
|
1,146,319
|
|
|
1.05
|
%
|
|
$
|
1,047,110
|
|
|
0.66
|
%
|
|
$
|
950,441
|
|
|
0.51
|
%
|
|
|
(1)
|
Comprised of time certificates of deposit in denominations of less than and more than $100,000.
|
Deposit Totals
Deposits totaled
$1.1 billion
at
December 31, 2018
as compared to
$1.1 billion
at
December 31, 2017
. The following table provides information regarding the mix of our deposits at
December 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018
|
|
At December 31, 2017
|
|
Amounts
|
|
% of Total Deposits
|
|
Amounts
|
|
% of Total Deposits
|
|
(Dollars in thousands)
|
Core deposits
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits
|
$
|
340,406
|
|
|
30.0
|
%
|
|
$
|
338,273
|
|
|
29.7
|
%
|
Savings and other interest-bearing transaction deposits
|
524,499
|
|
|
46.2
|
%
|
|
439,784
|
|
|
38.6
|
%
|
Time deposits
|
271,097
|
|
|
23.9
|
%
|
|
361,336
|
|
|
31.7
|
%
|
Total deposits
|
$
|
1,136,002
|
|
|
100.0
|
%
|
|
$
|
1,139,393
|
|
|
100.0
|
%
|
Certificates of deposit in denominations of $100,000 or more, on which we pay higher rates of interest than on other deposits, aggregated
$244.2 million
, or
21.5%
, of total deposits at
December 31, 2018
, as compared to
$330.5 million
, and
29.0%
, of total deposits at
December 31, 2017
.
Set forth below is a maturity schedule of domestic time certificates of deposit outstanding at
December 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Maturities
|
Certificates of
Deposit Under
$ 100,000
|
|
Certificates of
Deposit $100,000
or more
|
|
Certificates of
Deposit Under
$100,000
|
|
Certificates of
Deposit $100,000
or more
|
|
(Dollars in thousands)
|
Three months or less
|
$
|
7,074
|
|
|
$
|
60,802
|
|
|
$
|
8,674
|
|
|
$
|
77,981
|
|
Over three and through six months
|
5,162
|
|
|
64,020
|
|
|
5,532
|
|
|
47,652
|
|
Over six and through twelve months
|
9,936
|
|
|
80,212
|
|
|
10,391
|
|
|
90,470
|
|
Over twelve months
|
4,710
|
|
|
39,181
|
|
|
6,214
|
|
|
114,422
|
|
Total
|
$
|
26,882
|
|
|
$
|
244,215
|
|
|
$
|
30,811
|
|
|
$
|
330,525
|
|
Liquidity
We actively manage our liquidity needs to ensure that sufficient funds are available to meet our needs for cash, including to fund new loans to and deposit withdrawals by our customers. We project the future sources and uses of funds and maintain liquid funds for unanticipated events. Our primary sources of cash include cash we have on deposit at other financial institutions, payments from borrowers on their loans, proceeds from sales or maturities of securities held for sale, increases in deposits and increases in borrowings principally from the FHLB. The primary uses of cash include funding new loans and making advances on existing lines of credit, purchasing investments, including securities available for sale, funding deposit withdrawals and paying operating expenses. We maintain funds in overnight federal funds and other short-term investments to provide for short-term liquidity needs. We also have obtained credit lines from the FHLB and other financial institutions to meet any additional liquidity requirements we might have. See "—
Contractual Obligations
—
Borrowings
" below for additional information related to our borrowings from the FHLB.
Our liquid assets, which included cash and due from banks, federal funds sold, interest earning deposits that we maintain with financial institutions and unpledged securities available for sale (excluding Federal Reserve Bank and FHLB stock) totaled
$202.2 million
, which represented
15%
of total assets, at
December 31, 2018
. We believe that our cash and cash equivalent resources, together with available borrowings under our credit facilities, will be sufficient to meet normal operating requirements for at least the next twelve months, including to enable us to meet any increase in deposit withdrawals that might occur in the foreseeable future.
Cash Flow Provided by Operating Activities
. In
2018
, operating activities provided net cash of
$17.3 million
primarily attributable to our net income of
$27.3 million
, partially offset by a non-cash recognition of $11.1 million in our deferred tax asset, which resulted from the full release of our valuation allowance. In
2017
, operating activities provided net cash of
$10.6 million
primarily attributable to net income of $10.4 million.
Cash Flow Used in Investing Activities
. In
2018
, investing activities used net cash of
$24.0 million
, primarily attributable to
$32.3 million
used to fund an increase in loans and
$5.2 million
used to purchase securities available for sale and other stock, partially offset by $6.9 million of cash provided from the sale of debt securities available for sale and equity securities and
$6.0 million
of cash from maturities of and principal payments on securities available for sale. In
2017
, investing activities used net cash of
$115.5 million
, primarily attributable to
$120.2 million
used to fund an increase in loans and $3.4 million used to purchase securities available for sale and other stock, partially offset by $6.8 million of cash from maturities of and principal payments on securities available for sale.
Cash Flow Provided by Financing Activities
. In
2018
, financing activities used net cash of
$3.7 million
, consisting primarily of a
$5.5 million
net decrease in interest bearing deposits, which resulted from a decision to decrease our reliance on certificates of deposit, and a $727 thousand net decrease in borrowings, partially offset by a
$2.1 million
net increase in noninterest bearing deposits. In
2017
, financing activities provided net cash of
$164.3 million
, consisting primarily of a $5.7 million net increase in noninterest bearing deposits and a $132.4 million net increase in interest bearing deposits, which resulted from a decision to increase our liquidity, and a $25.0 million net increase in borrowings.
Ratio of Loans to Deposits
. The relationship between gross loans and total deposits can provide a useful measure of a bank’s liquidity. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan-to-deposit ratio the less liquid are our assets. On the other hand, since we realize greater yields on loans than we do on investments, a lower loan-to-deposit ratio can adversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements of liquidity and the need to generate a fair return on our assets. At
December 31, 2018
and
2017
, the loan-to-deposit ratio was
96%
and
93%
, respectively.
Capital Resources
Regulatory Capital Requirements Applicable to Banking Institutions
Under federal banking regulations that apply to all United States-based bank holding companies over $3 billion in total assets and all federally insured banks, the Bank (on a stand-alone basis) must meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. The Company (on a consolidated basis) is below the reporting threshold of $3 billion in total assets and therefore exempt from these capital adequacy requirements. These regulations place a banking institution into one of five capital categories based on its regulatory capital ratios:
|
|
•
|
significantly undercapitalized; or
|
|
|
•
|
critically undercapitalized
|
Certain qualitative assessments also are made by a banking institution’s primary federal regulatory agency that could lead the agency to determine that the banking institution should be assigned to a lower capital category than the one indicated by the quantitative measures used to assess the institution’s capital adequacy. At each successive lower capital category, a banking institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total capital, common equity Tier 1 capital and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). We believe that, as of
December 31, 2018
, the Bank met all capital adequacy requirements to which it was subject and has not been notified by any regulatory agency that would require the Bank to maintain additional capital.
The actual capital amounts and ratios of the Bank at
December 31, 2018
are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable Federal Regulatory Requirement
|
At December 31, 2018
|
Actual Capital
|
|
For Capital Adequacy Purposes
|
|
To be Categorized As Well Capitalized
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
(Dollars in thousands)
|
Total Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
Bank
|
160,372
|
|
|
13.0
|
%
|
|
106,072
|
|
|
At least 8.625
|
|
$
|
122,982
|
|
|
At least 10.0
|
Common Equity Tier 1 Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
146,516
|
|
|
11.9
|
%
|
|
63,028
|
|
|
At least 5.125
|
|
79,938
|
|
|
At least 6.5
|
Tier 1 Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
Bank
|
146,516
|
|
|
11.9
|
%
|
|
81,475
|
|
|
At least 6.625
|
|
$
|
98,385
|
|
|
At least 8.0
|
Tier 1 Capital to Average Assets:
|
|
|
|
|
|
|
|
|
|
Bank
|
146,516
|
|
|
10.8
|
%
|
|
54,403
|
|
|
At least 4.0
|
|
$
|
68,004
|
|
|
At least 5.0
|
As the above table indicates, at
December 31, 2018
, the Bank (on a stand-alone basis) had capital ratios exceeding the minimums required to be qualified as a “well-capitalized” institution under federally mandated capital standards and federally established prompt corrective action regulations.
In early July 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new common equity Tier 1 capital ratio, increase the minimum Tier 1 capital ratio requirement, and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. The final rules took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rules. At
December 31, 2018
, the Bank (on a stand-alone basis) continued to qualify as a well-capitalized institution under the capital adequacy guidelines described above.
Dividend Policy and Share Repurchase Programs.
It is, and since the beginning of 2009 it has been, the policy of the Boards of Directors of the Company and the Bank to preserve cash to enhance our capital positions and the Bank's liquidity. In addition, we have agreed that the Bank will not, without the FRB and the CDBO's prior written approval, pay any dividends to Bancorp. Accordingly, we do not expect to pay dividends or make share repurchases for the foreseeable future.
The principal source of cash available to a bank holding company consists of cash dividends from its bank subsidiaries. There are currently several restrictions on the Bank’s ability to pay us cash dividends. Government regulations, including the laws of the State of California, as they pertain to the payment of cash dividends by California state chartered banks, limits the amount of funds that the Bank is permitted to dividend to us. Further, Section 23(a) of the Federal Reserve Act limits the amounts that a bank may loan to its bank holding company to an aggregate of no more than 10% of the bank subsidiary’s capital surplus and retained earnings and requires that such loans be secured by specified assets of the bank holding company. We have committed to obtaining approval from the FRB and the CDBO prior to Bancorp paying any dividends, or making any distributions representing interest, principal or other sums on subordinated debentures or trust preferred securities. There can be no assurance that our regulators will approve such payments or dividends in the future. Refer to “Supervision and Regulation” above in Item 1 and
Note 14, Shareholders' Equity
in the notes to our consolidated financial statements for more detail regarding the regulatory restrictions on our and the Bank's ability to pay dividends.
Off Balance Sheet Arrangements
Loan Commitments and Standby Letters of Credit
. To meet the financing needs of our customers in the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. At
December 31, 2018
and
2017
, we were committed to fund certain loans including letters of credit amounting to approximately
$302 million
and
$295 million
, respectively.
Commitments to extend credit and standby letters of credit generally have fixed expiration dates or other termination clauses and the customer may be required to pay a fee and meet other conditions in order to draw on those commitments or standby letters of credit. We expect, based on historical experience, that many of the commitments will expire without being drawn upon and, therefore, the total commitment amounts do not necessarily represent future cash requirements.
To varying degrees, commitments to extend credit involve elements of credit and interest rate risk for us that are in excess of the amounts recognized in our balance sheets. Our maximum exposure to credit loss in the event of nonperformance by the customers to whom such commitments are made could potentially be equal to the amount of those commitments. As a result, before making such a commitment to a customer, we evaluate the customer’s creditworthiness using the same underwriting standards that we would apply if we were approving loans to the customer. In addition, we often require the customer to secure its payment obligations for amounts drawn on such commitments with collateral such as accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, residential properties and properties under construction. As a consequence, our exposure to credit and interest rate risk on such commitments is not different in character or amount than risks inherent in the outstanding loans in our loan portfolio.
Standby letters of credit are conditional commitments issued by the Bank to guarantee a payment obligation of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.
Contractual Obligations
The following table summarizes the contractual obligations as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity/Obligation by Period
|
|
Total
|
|
Less than 1 year
|
|
1 - 3 years
|
|
3 - 5 years
|
|
More than 5 years
|
|
(Dollars in thousands)
|
Deposits
|
$
|
1,136,002
|
|
|
$
|
1,092,111
|
|
|
$
|
31,711
|
|
|
$
|
12,180
|
|
|
$
|
—
|
|
FHLB Borrowings
|
40,000
|
|
|
40,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Junior Subordinated Debentures
|
17,527
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,527
|
|
Operating Leases
|
4,657
|
|
|
2,398
|
|
|
1,589
|
|
|
670
|
|
|
—
|
|
Total
|
$
|
1,198,186
|
|
|
$
|
1,134,509
|
|
|
$
|
33,300
|
|
|
$
|
12,850
|
|
|
$
|
17,527
|
|
The table above excludes unrecognized tax benefits because we are unable to reasonably estimate the period during which these obligations may be incurred, if at all.
FHLB Borrowings
. As of
December 31, 2018
, we had
$40.0 million
of outstanding borrowings obtained from the FHLB. The table below sets forth the amounts of, the interest rates we pay on, and the maturity dates of these FHLB borrowings. These borrowings had a weighted-average annualized interest rate of
2.54%
for the year ended
December 31, 2018
.
|
|
|
|
|
|
|
|
Principal Amounts
|
|
Interest Rate
|
|
Maturity Dates
|
(Dollars in thousands)
|
10,000
|
|
|
2.31
|
%
|
|
January 15, 2019
|
10,000
|
|
|
2.55
|
%
|
|
March 4, 2019
|
10,000
|
|
|
2.66
|
%
|
|
May 28, 2019
|
10,000
|
|
|
2.65
|
%
|
|
June 26, 2019
|
At
December 31, 2018
,
$807 million
of loans were pledged to secure our FHLB borrowings and to support our unfunded borrowing capacity. At
December 31, 2018
, we had unused borrowing capacity of
$365 million
with the FHLB.
The highest amount of borrowings outstanding at any month-end during the year ended
December 31, 2018
was
$40.9 million
, which consisted primarily of borrowings from the FHLB. By comparison, the highest amount of borrowings outstanding at any month end in
2017
consisted primarily of
$40.9 million
of borrowings from the FHLB.
Junior Subordinated Debentures
. Pursuant to rulings of the FRB, bank holding companies were permitted to issue long term subordinated debt instruments that, subject to certain conditions, would qualify as and, therefore, augment capital for regulatory purposes. At
December 31, 2018
, we had outstanding approximately
$17.5 million
principal amount of the Debentures.
Set forth below is certain information regarding the Debentures:
|
|
|
|
|
|
|
|
|
Original Issue Dates
|
Principal Amount
|
|
Interest Rates
|
|
Maturity Dates
|
September 2002
|
$
|
7,217
|
|
|
LIBOR plus 3.40%
|
|
September 2032
|
October 2004
|
10,310
|
|
|
LIBOR plus 2.00%
|
|
October 2034
|
Total
|
$
|
17,527
|
|
|
|
|
|
|
|
(1)
|
Subject to the receipt of prior regulatory approval, we may redeem the Debentures, in whole or in part, without premium or penalty, at any time prior to maturity.
|
These Debentures require quarterly interest payments, which are used to make quarterly distributions required to be paid on the corresponding trust preferred securities. Subject to certain conditions, we have the right, at our discretion, to defer those interest payments, and the corresponding distributions on the trust preferred securities, for up to five years. Exercise of this deferral right does not constitute a default of our obligations to pay the interest on the Debentures or the corresponding distributions that are payable on the trust preferred securities. As of
December 31, 2018
, we were current on all interest payments. We have committed to obtaining approval from the FRB and the CDBO prior to making any distributions representing interest, principal or other sums on subordinated debentures or trust preferred securities. There can be no assurance that our regulators will approve such payments in the future.
Operating Lease Obligations
. We lease certain facilities and equipment under various non-cancelable operating leases, which include escalation clauses ranging between
2%
and
6%
per annum. Future minimum non-cancelable lease commitments, were as follows:
|
|
|
|
|
|
At December 31, 2018
|
|
(Dollars in thousands)
|
2019
|
$
|
2,398
|
|
2020
|
1,242
|
|
2021
|
347
|
|
2022
|
218
|
|
2023 and beyond
|
452
|
|
Total
|
$
|
4,657
|
|
Maturing Time Certificates of Deposits
. Set forth below is a maturity schedule, as of
December 31, 2018
, of time certificates of deposit of $100,000 or more:
|
|
|
|
|
|
At December 31, 2018
|
|
(In thousands)
|
2019
|
$
|
205,034
|
|
2020
|
26,333
|
|
2021
|
1,647
|
|
2022
|
9,545
|
|
2023 and beyond
|
1,656
|
|
Total
|
$
|
244,215
|
|
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 assumptions and judgments regarding circumstances or trends that could
affect the carrying value of our material assets, such as, for example, assumptions regarding 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, such as securities available for sale and our deferred tax asset. Those assumptions and judgments are based on current information available to us regarding those economic conditions or trends or other circumstances. If adverse changes were to occur in the conditions, trends or other events on which our assumptions or judgments had been based, then under GAAP it could become necessary for us to reduce the carrying values of any affected assets on our balance sheet. In addition, because reductions in the carrying value of assets are sometimes effectuated by or require charges to income, such reductions also may have the effect of reducing our income.
Our critical accounting policies consist of the accounting policies and practices we follow in determining (i) the sufficiency of the allowance we establish for loan and lease losses, (ii) the fair values of our investment securities available for sale and financial instruments, and (iii) the amount of our deferred tax asset, consisting primarily of tax loss carryforwards and tax credits that we believe will be able to offset income taxes in future periods.
Allowance for Loan and Lease Losses.
We maintain reserves to provide for loan and lease losses that occur in the ordinary course of the banking business. When it is determined that the payment in full of a loan has become unlikely, the carrying value of the loan is reduced ("written down") to what management believes is its realizable value or, if it is determined that a loan no longer has any realizable value, the carrying value of the loan is written off in its entirety (a loan "charge-off"). Loan charge-offs and write-downs are charged against our ALLL. The amount of the ALLL is increased periodically to replenish the ALLL after it has been reduced due to loan write-downs or charge-offs. The ALLL also is increased or decreased periodically to reflect increases or decreases in the volume of outstanding loans and to take account of changes in the risk of potential loan losses due to a deterioration or improvement in the condition of borrowers or in the value of properties securing non-performing loans or adverse changes or improvements in economic conditions. Increases in the ALLL are made through a charge, recorded as an expense in the statement of operations, referred to as the "provision for loan and lease losses." Recoveries of loans previously charged-off are added back to and, therefore, to that extent increase the ALLL and reduce the amount of the provision for loan losses that might otherwise have had to be made to replenish or increase the ALLL. See "—Financial Condition—Nonperforming Loans and the Allowance for Loan and Lease Losses" above in this Item 7 for additional information regarding the ALLL.
Fair Value of Securities Available for Sale.
Under applicable accounting principles, we are required to recognize any unrealized loss or gain on the securities we hold for sale. An unrealized gain occurs when the fair value of a security available for sale increases above its amortized cost as recorded on our balance sheet. An unrealized loss occurs when the fair value of a security available for sale declines below its amortized cost as recorded on our balance sheet. As a result, we make determinations, on a quarterly basis, of the fair values of the securities available for sale in order to determine if there are any unrealized losses in those securities. When there is an active market for such a security, the determination of its fair value is based on market prices. If there is no active trading market, but such securities do trade from time to time, we rely primarily on quotes we obtain from third party vendors and securities brokers to determine the fair values of those securities. However, quotes are not always available for some securities and, in those instances, we make those fair value determinations on the basis of a variety of industry standard pricing methodologies, such as discounted cash flow analyses, matrix pricing, and option adjusted spread models, as well as fundamental analysis of the creditworthiness of the obligors under those securities. These methodologies require us to make various assumptions relating to such matters as future prepayment speeds, yield, duration, Federal Reserve Board monetary policies and the supply and demand for the individual securities. Consequently, if changes were to occur in market or other conditions or the circumstances on which our earlier assumptions or judgments were based, it could become necessary for us to reduce the fair values of such securities, which would result in charges to accumulated other comprehensive income (loss) on our balance sheet. Moreover, if we conclude that reductions in the fair values of any securities are other than temporary, it would be necessary for us to recognize an impairment loss to noninterest income in our statement of operations.
Fair Value of Financial Instruments.
ASC 820-10-35 defines fair value, establishes a framework for measuring fair value and outlines a fair value hierarchy based on the inputs to valuation techniques used to measure fair value. Fair value is defined 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 (also referred to as an exit price). Fair value measurements are categorized into a three-level hierarchy based on the extent to which the measurement relies on observable market inputs in measuring fair value. Level 1, which is the highest priority in the fair value hierarchy, is based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 is based upon quoted prices in active markets for identical assets or liabilities. Level 3, which is the lowest priority in the fair value hierarchy, is based on unobservable inputs. Assets and liabilities are classified within this hierarchy in their entirety based on the lowest level of any input that is significant to the fair value measurement.
The use of fair value to measure our financial instruments is fundamental to our financial statements and is a critical accounting estimate because a substantial portion of our mortgage banking assets and liabilities (included in discontinued operations) are recorded at estimated fair value. Financial instruments classified as Level 3 are generally based on unobservable inputs, and the process to determine fair value is generally more subjective and involves a high degree of management judgment
and assumptions. These assumptions may have a significant effect on our estimates of fair value, and the use of different assumptions, as well as changes in market conditions and interest rates, could have a material effect on our results of operations or financial condition.
Utilization and Valuation of Deferred Income Tax Benefits
. We record as a “deferred tax asset” on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions (“tax benefits”) that we believe will be available to us to offset or reduce income taxes in future periods. Under applicable federal and state income tax laws and regulations, in most cases such tax benefits will expire, if they cannot be used, within specified periods of time. Accordingly, the ability to fully use our deferred tax asset to reduce income taxes in the future depends on the amount of taxable income that we generate during those time periods. At least once each year, or more frequently, if circumstances warrant, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely, than not, that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude, instead, that it has become more likely, than not, that we will be unable to utilize those tax benefits in full prior to their expiration, then, we would establish, or increase any existing, reserves (commonly referred to as a “valuation allowance”) to reduce the deferred tax asset on our balance sheet to the amount with respect to which we believe it is still more likely, than not, that we will be able to use to offset or reduce taxes in the future. The establishment of or an increase in that valuation allowance is implemented by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that we would otherwise have recorded in our statements of operations. The determination of whether and the extent to which we will be able to utilize our deferred tax asset involves significant judgments and assumptions that are subject to period to period changes as a result of changes in tax laws, changes in market or economic conditions that could affect our operating results or variances between our actual operating results and the operating results that we had projected for any such period, as well as other factors.
|
|
ITEM 8.
|
FINANCIAL STATEMENTS
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Pacific Mercantile Bancorp
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Pacific Mercantile Bancorp[and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 11, 2019, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company’s auditor since 2014.
Irvine, CA
March 11, 2019
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
ASSETS
|
|
|
|
Cash and due from banks
|
$
|
13,250
|
|
|
$
|
12,198
|
|
Interest bearing deposits with financial institutions
|
174,468
|
|
|
186,010
|
|
Cash and cash equivalents
|
187,718
|
|
|
198,208
|
|
Interest-bearing time deposits with financial institutions
|
2,420
|
|
|
2,920
|
|
Federal Reserve Bank of San Francisco and Federal Home Loan Bank Stock, at cost
|
8,822
|
|
|
8,107
|
|
Securities available for sale, at fair value
|
31,231
|
|
|
39,738
|
|
Loans (net of allowances of $13,506 and $14,196, respectively)
|
1,083,240
|
|
|
1,053,201
|
|
Other real estate owned
|
1,173
|
|
|
—
|
|
Accrued interest receivable
|
4,003
|
|
|
3,872
|
|
Premises and equipment, net
|
1,039
|
|
|
1,094
|
|
Net deferred tax assets
|
10,935
|
|
|
—
|
|
Other assets
|
18,757
|
|
|
15,464
|
|
Total assets
|
$
|
1,349,338
|
|
|
$
|
1,322,604
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
Deposits:
|
|
|
|
Noninterest-bearing
|
$
|
340,406
|
|
|
$
|
338,273
|
|
Interest-bearing
|
795,596
|
|
|
801,120
|
|
Total deposits
|
1,136,002
|
|
|
1,139,393
|
|
Borrowings
|
40,000
|
|
|
40,866
|
|
Accrued interest payable
|
361
|
|
|
397
|
|
Other liabilities
|
14,074
|
|
|
11,545
|
|
Junior subordinated debentures
|
17,527
|
|
|
17,527
|
|
Total liabilities
|
1,207,964
|
|
|
1,209,728
|
|
Commitments and contingencies (Note 15)
|
|
|
|
Shareholders’ equity:
|
|
|
|
Preferred stock, no par value, 1,467,155 shares authorized:
|
|
|
|
Series A Non-Voting Preferred Stock, no par value, 1,467,155 shares authorized at December 31, 2018 and 0 shares authorized at December 31, 2017; 1,467,155 shares issued and outstanding at December 31, 2018 and 0 shares issued and outstanding at December 31, 2017
|
8,480
|
|
|
—
|
|
Common stock, no par value, 85,000,000 shares authorized; 21,916,195 and 23,232,515 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively
|
143,466
|
|
|
150,689
|
|
Accumulated deficit
|
(9,428
|
)
|
|
(36,670
|
)
|
Accumulated other comprehensive loss
|
(1,144
|
)
|
|
(1,143
|
)
|
Total shareholders’ equity
|
141,374
|
|
|
112,876
|
|
Total liabilities and shareholders’ equity
|
$
|
1,349,338
|
|
|
$
|
1,322,604
|
|
The accompanying notes are an integral part of these consolidated financial statements.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Interest income:
|
|
|
|
|
|
Loans, including fees
|
$
|
57,626
|
|
|
$
|
48,957
|
|
|
$
|
38,580
|
|
Securities available for sale and stock
|
1,160
|
|
|
1,237
|
|
|
1,578
|
|
Interest-bearing deposits with financial institutions
|
3,756
|
|
|
1,379
|
|
|
842
|
|
Total interest income
|
62,542
|
|
|
51,573
|
|
|
41,000
|
|
Interest expense:
|
|
|
|
|
|
Deposits
|
12,070
|
|
|
6,958
|
|
|
4,820
|
|
Borrowings
|
1,550
|
|
|
873
|
|
|
657
|
|
Total interest expense
|
13,620
|
|
|
7,831
|
|
|
5,477
|
|
Net interest income
|
48,922
|
|
|
43,742
|
|
|
35,523
|
|
Provision for loan and lease losses
|
—
|
|
|
—
|
|
|
19,870
|
|
Net interest income after provision for loan and lease losses
|
48,922
|
|
|
43,742
|
|
|
15,653
|
|
Noninterest income
|
|
|
|
|
|
Service fees on deposits and other banking services
|
1,549
|
|
|
1,347
|
|
|
1,093
|
|
Net gain (loss) on sale of securities available for sale
|
48
|
|
|
(4
|
)
|
|
—
|
|
Net gain on sale of small business administration loans
|
—
|
|
|
—
|
|
|
40
|
|
Net loss on sale of other assets
|
(4
|
)
|
|
(37
|
)
|
|
(527
|
)
|
Other noninterest income
|
3,042
|
|
|
3,068
|
|
|
2,331
|
|
Total noninterest income
|
4,635
|
|
|
4,374
|
|
|
2,937
|
|
Noninterest expense
|
|
|
|
|
|
Salaries and employee benefits
|
23,749
|
|
|
22,977
|
|
|
21,817
|
|
Occupancy
|
2,388
|
|
|
2,605
|
|
|
3,061
|
|
Equipment and depreciation
|
1,802
|
|
|
1,687
|
|
|
1,802
|
|
Data processing
|
1,681
|
|
|
1,479
|
|
|
1,271
|
|
FDIC expense
|
927
|
|
|
1,073
|
|
|
950
|
|
Other real estate owned expense, net
|
123
|
|
|
—
|
|
|
(70
|
)
|
Professional fees
|
2,468
|
|
|
4,215
|
|
|
4,046
|
|
Business development
|
946
|
|
|
729
|
|
|
795
|
|
Loan related expense
|
769
|
|
|
456
|
|
|
375
|
|
Insurance
|
248
|
|
|
221
|
|
|
291
|
|
Other operating expense
|
1,869
|
|
|
2,316
|
|
|
2,063
|
|
Total noninterest expense
|
36,970
|
|
|
37,758
|
|
|
36,401
|
|
Income before income taxes
|
16,587
|
|
|
10,358
|
|
|
(17,811
|
)
|
Income tax (benefit) provision
|
(10,752
|
)
|
|
(91
|
)
|
|
16,832
|
|
Net income (loss) allocable to common shareholders
|
$
|
27,339
|
|
|
$
|
10,449
|
|
|
$
|
(34,643
|
)
|
Basic income (loss) per common share:
|
|
|
|
|
|
Net income (loss) allocable to common shareholders
|
$
|
1.17
|
|
|
$
|
0.45
|
|
|
$
|
(1.51
|
)
|
Diluted income (loss) per common share:
|
|
|
|
|
|
Net income (loss) allocable to common shareholders
|
$
|
1.16
|
|
|
$
|
0.45
|
|
|
$
|
(1.51
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
Basic
|
22,788,164
|
|
|
23,071,671
|
|
|
22,802,439
|
|
Diluted
|
23,527,183
|
|
|
23,312,292
|
|
|
22,958,644
|
|
The accompanying notes are an integral part of these consolidated financial statements.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Net income (loss)
|
$
|
27,339
|
|
|
$
|
10,449
|
|
|
$
|
(34,643
|
)
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
Change in unrealized holding (loss) gain on securities available for sale
|
(50
|
)
|
|
695
|
|
|
(1,032
|
)
|
Less: Reclassification adjustment for change in accounting principle
|
(97
|
)
|
|
—
|
|
|
—
|
|
Less: Reclassification adjustment for net gains (losses) included in net income
|
48
|
|
|
(4
|
)
|
|
—
|
|
Net unrealized holding (loss) gain on securities available for sale
|
(1
|
)
|
|
699
|
|
|
(1,032
|
)
|
Total comprehensive income (loss)
|
$
|
27,338
|
|
|
$
|
11,148
|
|
|
$
|
(35,675
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Shares and dollars in thousands)
For the Three Years Ended
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Non-Voting
Preferred stock
|
|
Common stock
|
|
Retained
earnings
(accumulated
deficit)
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Total
|
Number
of shares
|
|
Amount
|
|
Number
of shares
|
|
Amount
|
|
Balance at December 31, 2015
|
—
|
|
|
$
|
—
|
|
|
22,820
|
|
|
$
|
147,202
|
|
|
$
|
(12,476
|
)
|
|
$
|
(810
|
)
|
|
$
|
133,916
|
|
Issuance of restricted stock, net
|
|
|
|
|
90
|
|
|
|
|
|
|
|
|
—
|
|
Tax effect from vesting of restricted stock
|
|
|
|
|
(2
|
)
|
|
(16
|
)
|
|
|
|
|
|
(16
|
)
|
Common stock based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
1,039
|
|
|
—
|
|
|
—
|
|
|
1,039
|
|
Common stock options exercised
|
—
|
|
|
—
|
|
|
97
|
|
|
455
|
|
|
—
|
|
|
—
|
|
|
455
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(34,643
|
)
|
|
—
|
|
|
(34,643
|
)
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,032
|
)
|
|
(1,032
|
)
|
Balance at December 31, 2016
|
—
|
|
|
$
|
—
|
|
|
23,005
|
|
|
$
|
148,680
|
|
|
$
|
(47,119
|
)
|
|
$
|
(1,842
|
)
|
|
$
|
99,719
|
|
Issuance of restricted stock, net
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common Stock based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
796
|
|
|
—
|
|
|
—
|
|
|
796
|
|
Common stock options exercised
|
—
|
|
|
—
|
|
|
206
|
|
|
1,213
|
|
|
—
|
|
|
—
|
|
|
1,213
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,449
|
|
|
—
|
|
|
10,449
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
699
|
|
|
699
|
|
Balance at December 31, 2017
|
—
|
|
|
$
|
—
|
|
|
23,233
|
|
|
$
|
150,689
|
|
|
$
|
(36,670
|
)
|
|
$
|
(1,143
|
)
|
|
$
|
112,876
|
|
Exchange of common stock for Series A Non-Voting Preferred Stock
|
1,467
|
|
|
8,480
|
|
|
(1,467
|
)
|
|
(8,480
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Implementation of ASU 2016-01
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(97
|
)
|
|
—
|
|
|
(97
|
)
|
Issuance of restricted stock, net
|
—
|
|
|
—
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
885
|
|
|
—
|
|
|
—
|
|
|
885
|
|
Common stock options exercised
|
—
|
|
|
—
|
|
|
75
|
|
|
372
|
|
|
—
|
|
|
—
|
|
|
372
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,339
|
|
|
—
|
|
|
27,339
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Balance at December 31, 2018
|
1,467
|
|
|
$
|
8,480
|
|
|
21,916
|
|
|
$
|
143,466
|
|
|
$
|
(9,428
|
)
|
|
$
|
(1,144
|
)
|
|
$
|
141,374
|
|
The accompanying notes are an integral part of these consolidated financial statements.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
Net income (loss)
|
$
|
27,339
|
|
|
$
|
10,449
|
|
|
$
|
(34,643
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
405
|
|
|
428
|
|
|
485
|
|
Provision for loan and lease losses
|
—
|
|
|
—
|
|
|
19,870
|
|
Amortization of premium on securities
|
179
|
|
|
221
|
|
|
283
|
|
Net (gain) loss on sale of securities available for sale
|
(48
|
)
|
|
4
|
|
|
—
|
|
Other
|
59
|
|
|
—
|
|
|
—
|
|
Net amortization of deferred fees and unearned income on loans
|
50
|
|
|
(388
|
)
|
|
(349
|
)
|
Net gain on sales of other real estate owned
|
(29
|
)
|
|
—
|
|
|
(107
|
)
|
Net gain on sale of premises and equipment
|
—
|
|
|
(2
|
)
|
|
—
|
|
Net loss on sale of other assets
|
4
|
|
|
37
|
|
|
527
|
|
Net gain on sale of small business administration loans
|
—
|
|
|
—
|
|
|
(40
|
)
|
Small business administration loan originations
|
—
|
|
|
—
|
|
|
(806
|
)
|
Proceeds from sale of small business administration loans
|
—
|
|
|
—
|
|
|
840
|
|
Write down of other real estate owned
|
102
|
|
|
—
|
|
|
—
|
|
Stock-based compensation expense
|
885
|
|
|
796
|
|
|
1,039
|
|
Tax effect of restricted stock vesting
|
—
|
|
|
—
|
|
|
(16
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Net increase in accrued interest receivable
|
(131
|
)
|
|
(1,170
|
)
|
|
(436
|
)
|
Net (increase) decrease in other assets
|
(3,193
|
)
|
|
(4,376
|
)
|
|
144
|
|
Net (increase) decrease in deferred taxes
|
(11,077
|
)
|
|
—
|
|
|
16,837
|
|
Net decrease (increase) in income taxes receivable
|
226
|
|
|
(215
|
)
|
|
681
|
|
Net (decrease) increase in accrued interest payable
|
(36
|
)
|
|
196
|
|
|
(54
|
)
|
Net increase in other liabilities
|
2,529
|
|
|
4,603
|
|
|
91
|
|
Net cash provided by operating activities
|
17,264
|
|
|
10,583
|
|
|
4,346
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
Net decrease in interest-bearing time deposits with financial institutions
|
500
|
|
|
749
|
|
|
996
|
|
Maturities of and principal payments received on securities available for sale and other stock
|
5,978
|
|
|
7,247
|
|
|
8,193
|
|
Purchase of securities available for sale and other stock
|
(5,215
|
)
|
|
(3,350
|
)
|
|
—
|
|
Proceeds from sale of securities available for sale and other stock
|
6,883
|
|
|
382
|
|
|
—
|
|
Principal payments received on other investments
|
17
|
|
|
—
|
|
|
—
|
|
Purchase of other investments
|
(364
|
)
|
|
(227
|
)
|
|
(385
|
)
|
Proceeds from sale of other real estate owned
|
827
|
|
|
—
|
|
|
757
|
|
Net increase in loans
|
(32,316
|
)
|
|
(120,205
|
)
|
|
(101,331
|
)
|
Proceeds from sale of other assets
|
32
|
|
|
141
|
|
|
33
|
|
Purchases of premises and equipment
|
(350
|
)
|
|
(265
|
)
|
|
(600
|
)
|
Proceeds from sale of premises and equipment
|
—
|
|
|
2
|
|
|
—
|
|
Net cash used in investing activities
|
(24,008
|
)
|
|
(115,526
|
)
|
|
(92,337
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
Net (decrease) increase in deposits
|
(3,391
|
)
|
|
138,093
|
|
|
107,460
|
|
Proceeds from borrowings
|
71,000
|
|
|
70,000
|
|
|
15,000
|
|
Payments of borrowings
|
(71,727
|
)
|
|
(45,000
|
)
|
|
(10,000
|
)
|
Proceeds from exercise of common stock options
|
372
|
|
|
1,213
|
|
|
455
|
|
Net cash (used in) provided by financing activities
|
(3,746
|
)
|
|
164,306
|
|
|
112,915
|
|
Net (decrease) increase in cash and cash equivalents
|
(10,490
|
)
|
|
59,363
|
|
|
24,924
|
|
Cash and Cash Equivalents, beginning of period
|
198,208
|
|
|
138,845
|
|
|
113,921
|
|
Cash and Cash Equivalents, end of period
|
$
|
187,718
|
|
|
$
|
198,208
|
|
|
$
|
138,845
|
|
Supplementary Cash Flow Information:
|
|
|
|
|
|
Cash paid for interest on deposits and other borrowings
|
$
|
13,656
|
|
|
$
|
7,635
|
|
|
$
|
5,531
|
|
Cash paid for income taxes
|
$
|
99
|
|
|
$
|
123
|
|
|
$
|
12
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Non-Cash Investing Activities:
|
|
|
|
|
|
Transfer of loans into other real estate owned
|
$
|
1,346
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Transfer of loans into other assets
|
$
|
15
|
|
|
$
|
217
|
|
|
$
|
—
|
|
Participation sold accounted for as other borrowings
|
$
|
—
|
|
|
$
|
866
|
|
|
$
|
—
|
|
Impact of change in accounting principle
|
$
|
97
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Assumption of debt upon foreclosure of property
|
$
|
727
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-Cash Financing Activities:
|
|
|
|
|
|
Exchange of common stock for preferred stock
|
$
|
8,480
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these consolidated financial statements.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Organization
Pacific Mercantile Bancorp (“PMBC”) is a bank holding company which, through its wholly owned subsidiary, Pacific Mercantile Bank (the “Bank”), is engaged in the commercial banking business in Southern California. PMBC is registered as a one bank holding company under the United States Bank Holding Company Act of 1956, as amended, and, as such, is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the Federal Reserve Bank of San Francisco (“FRBSF”) under delegated authority from the Federal Reserve Board. Substantially all of our operations are conducted and substantially all of our assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses, and income. The Bank provides a full range of banking services to small and medium-size businesses and professionals primarily in Orange, Los Angeles, San Bernardino and San Diego counties in Southern California and is subject to competition from, among other things, other banks and financial institutions and from financial services organizations conducting operations in those same markets. The Bank is chartered by the California Department of Business Oversight under the Division of Financial Institutions and is a member of the FRBSF. In addition, the deposit accounts of the Bank’s customers are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount allowed by law.
During the third quarter of 2018, PMBC dissolved its wholly-owned subsidiary, PM Asset Resolution, Inc. ("PMAR"), which was established for the purpose of purchasing certain non-performing loans and other real estate from the Bank and thereafter collecting or disposing of those assets. Prior to PMAR being dissolved, all assets were liquidated and returned to PMBC.
PMBC, the Bank and PMAR are sometimes referred to, together, on a consolidated basis, as the “Company” or as “we”, “us” or “our”.
2. Significant Accounting Policies
The accompanying consolidated financial statements have been prepared in accordance with the instructions of the U.S. Securities and Exchange Commission (the “SEC”) to Form 10-K and in accordance with generally accepted accounting principles in effect in the United States (“GAAP”), on a basis consistent with prior periods.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires us to make certain estimates and assumptions that could affect the reported amounts of certain of our assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of our revenues and expenses during the reporting periods. Material estimates that are particularly susceptible to changes in the near term relate primarily to our determinations of the allowance for loan and lease losses (“ALLL”), the fair values of securities available for sale, and the determination of a valuation allowance pertaining to deferred tax assets. If circumstances or financial trends on which those estimates were based were to change in the future or there were to occur any currently unanticipated events affecting the amounts of those estimates, our future financial position or results of operations could differ, possibly materially, from those expected at the current time.
Principles of Consolidation
Our consolidated financial statements for the years ended
December 31, 2018
,
2017
and
2016
include the accounts of PMBC, the Bank and PMAR. All significant intercompany balances and transactions were eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statements of cash flow, cash and cash equivalents consist of cash and due from banks, interest bearing demand deposits with the FRBSF, federal funds sold and interest-bearing deposits, with original maturities of 90 days or less, with financial institutions. Generally, federal funds are sold for one-day periods. As of
December 31, 2018
and
2017
, the Bank maintained required reserves with FRBSF of approximately
$727,000
and
$1,175,000
, respectively, which are included in cash and due from banks in the accompanying consolidated statements of financial condition.
Federal Home Loan Bank Stock and Federal Reserve Bank Stock
The Bank, as a member of the Federal Home Loan Bank System, is required to maintain an investment in capital stock of the Federal Home Loan Bank of San Francisco (“FHLB”) in varying amounts based on asset size and on amounts borrowed from the FHLB. Because no ready market exists and there is no quoted market value for this stock, the Bank’s investment in this stock is carried at cost.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank also maintains an investment in capital stock of the FRBSF, which is carried at cost because no ready market exists and there is no quoted market value for this stock.
Securities Available for Sale, at Fair Value
Securities available for sale are those which we intend to hold for an indefinite period of time, but which may be sold in response to changes in liquidity needs, changes in interest rates, changes in prepayment risks and other similar factors. These securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported as other comprehensive income or loss, net of taxes. Purchased premiums and discounts are recognized as interest income using the interest method over the term of these securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Declines in the fair value of these securities below their cost which are other-than-temporary are reflected in earnings as realized losses. In determining other-than-temporary losses, we consider a number of factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether we have the intent to sell the security or it is more likely than not that we will be required to sell the security before its anticipated recovery. A high degree of subjectivity and judgment is involved in assessing whether an other-than-temporary decline exists and such assessments are based on information available to us at the time we make such assessments. We recognize other-than-temporary impairments (“OTTI”) to our available-for-sale debt securities in accordance with FASB ASC 320-10. When there are credit losses associated with, but we have no intention to sell, an impaired debt security, and it is more likely than not that we will not have to sell the security before recovery of its cost basis, we will separate the amount of impairment, or OTTI, between the amount that is credit-related and the amount that is related to non-credit factors. Credit-related impairments are recognized in our consolidated statements of operations. Any non-credit-related impairments are recognized and reflected in other comprehensive income in our consolidated statements of financial condition.
Loans and Allowance for Loan and Lease Losses
Loans that we intend and have the ability to hold for the foreseeable future or until maturity or pay-off are stated at their respective principal amounts outstanding, net of unearned income. Interest is accrued daily as earned, except where reasonable doubt exists as to collectability of the loan. A loan with principal or interest that is 90 days or more past due, based on its contractual payment due dates, is placed on nonaccrual status, in which case accrual of interest is discontinued, except that we may elect to continue the accrual of interest when the estimated net realizable value of collateral securing the loan is expected to be sufficient to enable us to recover both principal and accrued interest and those loans are in the process of collection. Generally, interest payments received on nonaccrual loans are applied to principal. Once all principal has been received by us, any additional interest payments are recognized as interest income on a cash basis.
An ALLL is established by means of a provision for loan and lease losses that is charged against income. If we conclude that the collection, in full, of the carrying amount of a loan has become unlikely, the loan, or the portion thereof that is believed to be uncollectible, is charged against the ALLL. We carefully monitor changing economic conditions, the loan portfolio by category, the financial condition of borrowers and the history of the performance of the loan portfolio in determining the adequacy of the ALLL. Additionally, as the volume of loans increases, additional provisions for loan losses may be required to maintain the allowance at levels deemed adequate. Moreover, if economic conditions were to deteriorate, causing the risk of loan losses to increase, it would become necessary to increase the allowance to an even greater extent, which would necessitate additional provisions that would be charged to income. We also evaluate the unfunded portion of loan commitments and establish a loss reserve, included in other liabilities, for such unfunded commitments through a charge against noninterest expense. The loss reserve for unfunded loan commitments was
$350,000
at
December 31, 2018
and
2017
.
The ALLL is based on estimates, and ultimate loan losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are recorded in earnings in the periods in which they become known.
Impaired Loans
A loan is generally classified as impaired when, in management’s opinion, the principal or interest will not be collectible in accordance with its contractual terms. We measure and reserve for impairment on a loan-by-loan basis using either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. We exclude smaller, homogeneous loans, such as consumer installment loans and lines of credit, from these impairment calculations. Also, loans that experience insignificant payment delays or shortfalls are generally not considered impaired.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructured Loans
We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, concessions to the outstanding loan balances. These loans are classified as troubled debt restructurings (“TDRs”) and considered impaired loans. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition or cash flows. A workout plan between us and the borrower is designed to provide a bridge for borrower cash flow shortfalls in the near term. A TDR loan may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a time frame of at least
six
months and the ultimate collectability of the total contractual restructured principal and interest in no longer in doubt. These loans, while no longer considered a TDR, are still considered impaired loans.
Loan Origination Fees and Costs
Loan origination fees and related direct costs for loans held for investment are deferred and amortized to interest income as an adjustment to yield over the respective lives of the loans using the effective interest method, except for loans that are revolving or short-term in nature for which the straight line method is used, which approximates the interest method.
Investment in Unconsolidated Subsidiaries
Investment in unconsolidated subsidiaries is stated at cost. The unconsolidated subsidiaries are comprised of
two
grantor trusts established in 2002 and 2004 in connection with our issuance of subordinated debentures in each of those years. Prior to 2004, we organized two business trusts, under the names PMB Statutory Trust III and PMB Capital Trust III, to facilitate our issuance of
$7.2 million
and
$10.3 million
, respectively, principal amount of junior subordinated debentures with maturity dates in 2032 and 2034, respectively. The principal amounts remain outstanding as of
December 31, 2018
.
Other Real Estate Owned
Other real estate owned (“OREO”) consists of real properties acquired by us through foreclosure or in lieu of foreclosure in satisfaction of loans. OREO is recorded at fair value less estimated selling costs at the time of acquisition or foreclosure. Loan balances in excess of fair value, less selling costs, are charged to the ALLL prior to foreclosure. Any subsequent operating expenses or income, reductions in estimated fair values and gains or losses on disposition of such properties are charged or credited to current operations.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization which are charged to expense on a straight-line basis over the estimated useful lives of the assets or, in the case of leasehold improvements, over the term of the leases, whichever is shorter. For income tax purposes, accelerated depreciation methods are used. Maintenance and repairs are charged directly to expense as incurred. Improvements to premises and equipment that extend their useful lives are capitalized.
When such an asset is disposed of, the applicable costs and accumulated depreciation thereon are removed from the accounts and any resulting gain or loss is included in current operations. Rates of depreciation and amortization are based on the following estimated useful lives:
|
|
|
Furniture and equipment
|
Three to seven years
|
Leasehold improvements
|
Lesser of the lease term or estimated useful life
|
Income Taxes
Deferred income taxes and liabilities are determined using the asset and liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
We record as a deferred tax asset on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions ("tax benefits") that we believe will be available to us to offset or reduce the amount of our income taxes in future periods. Under applicable federal and state income tax laws and regulations, such tax benefits will expire if not used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset depends on the amount of taxable income that we generate during those time periods. At least once each year, or more frequently, if warranted, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely than not that we will be unable to utilize those tax benefits in full prior to their expiration, then, we would establish (or increase any existing) valuation allowance to reduce the deferred tax asset on our balance sheet to the amount which we believe we are more likely than not to be able to utilize. Such a reduction is implemented by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that we would otherwise have recorded in our statement of operations. The determination of whether and the extent to which we will be able to utilize our deferred tax asset involves significant management judgments and assumptions that are subject to period to period changes as a result of changes in tax laws, changes in market or economic conditions that could affect our operating results or variances between our actual operating results and our projected operating results, as well as other factors.
Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement.
Earnings (Loss) Per Share
Basic income (loss) per share for any fiscal period is computed by dividing net income (loss) allocable to our common shareholders for such period by the weighted average number of common shares outstanding during that period. Fully diluted income (loss) per share reflects the potential dilution that could have occurred assuming the conversion of any convertible securities into common stock at conversion prices, and the exercise of all outstanding options and warrants to purchase shares of our common stock at exercise prices, that were less than the market price of our shares, thereby increasing the number of shares outstanding during the period, and is determined using the treasury method. Although accumulated undeclared dividends on our preferred stock are not recorded in the accompanying consolidated statement of operations, such dividends are included for purposes of computing earnings (loss) per share available to our common shareholders.
Stock Option Plans
We follow Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 718-10,
Share-Based Payment
, which requires entities that grant stock options or other equity compensation awards to employees to recognize in their financial statements the fair values of those options or share awards as compensation cost over their requisite service (vesting) periods of those options or share awards. Since stock-based compensation cost that is recognized in the statements of operations is to be determined based on the equity compensation awards that we expect will ultimately vest, that compensation expense is reduced for any forfeitures of unvested options or unvested share awards that typically occur due primarily to terminations of employment of optionees or recipients of such share awards. In accordance with Accounting Standard Update (“ASU”) 2016-09, forfeitures are recognized as they occur instead of applying an estimated forfeiture rate to each grant, which was the previous practice. For purposes of the determination of stock-based compensation expense for the year ended
December 31, 2018
, we recognized actual forfeitures of
7,150
and
6,490
shares subject to the stock option and restricted stock awards that were granted to officers and other employees, respectively.
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, are reported as a separate component of the equity in the accompanying consolidated statement of financial condition, net of income taxes, and such items, along with net income, are components of comprehensive income (loss).
Segment Reporting
During the years ended
December 31, 2018
,
2017
and
2016
, we had
one
reportable segment, which was our commercial banking division, and
one
non-reportable segment which was our discontinued operations related to our mortgage banking division. In connection with our exit from the mortgage banking business in 2013, the revenues and expenses of our mortgage banking division have been classified as discontinued operations for all periods presented.
Recent Accounting Pronouncements
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
“Revenue from Contracts with Customers (Topic 606),”
which amended its guidance on revenue recognition to conform with international accounting guidance under the International Accounting Standards Board. The ASU provides a framework for addressing revenue recognition and replaces most existing revenue recognition guidance, as well as requires increased disclosure requirements. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year. Accordingly, this guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 15, 2016. We adopted this guidance on January 1, 2018 using the modified retrospective approach. Adoption of this guidance did not have a significant impact on our financial statements as the accounting for interest income on loans and investments, loan service fee income, prepayment fees, and loan origination fees are excluded from the scope of this standard. Upon implementation of this guidance, the cumulative effect of any adjustments was deemed immaterial and thus not significant. As such, the expanded disclosures required by the guidance, including the disaggregated revenue disclosures, were not deemed necessary since interest income sources are scoped out and there are no additional significant sources of non-interest income to be broken out on the consolidated statement of operations.
In January 2016, the FASB issued ASU 2016-01,
“Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,”
which enhances the reporting model for financial instruments to provide users of financial statements with more useful information. Some of the provisions include: requiring equity investments to be measured at fair value with changes in fair value recognized in net income, simplifying the impairment assessment of equity investments without readily determinable fair values, eliminating the requirement to disclose the method and significant assumptions used to estimate fair value on financial instruments measured at amortized cost on the balance sheet, requiring public business entities to use the exit price notion when measuring the fair value of financial instruments, requiring the reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option, requiring separate presentation of financial assets and liabilities by measurement category and form of financial asset on the balance sheet or notes to the financial statements, and clarifying that the reporting organization should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the organization's other deferred tax assets. This guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption was not permitted for public companies. We adopted this guidance on January 1, 2018. We recorded a
$97 thousand
adjustment to our beginning retained earnings upon adoption of this guidance as we had one available-for-sale equity investment where the change in fair value is currently recognized in net income, as compared to the previous practice of flowing through changes in fair value to other comprehensive income. This investment was sold during the three months ended March 31, 2018,which limited the impact of this accounting change on our consolidated financial statements and on our disclosures related to investments.
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842),”
which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability measured on a discounted basis and a right-of-use asset a specified asset for the lease term. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Under the new guidance, lessor accounting is largely unchanged and the accounting for sale and leaseback transactions were simplified. This guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We will adopt this guidance on January 1, 2019. We expect to elect all of the new standard’s available transition practical expedients.
We expect that this standard will have a material effect on our financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our office and equipment operating leases; and (2) providing significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between now and adoption.
On adoption, we currently expect to recognize additional operating liabilities of approximately
$11 million
, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. We expect an impact of approximately
$200 thousand
to our beginning retained earnings. The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for our equipment leases.
In June 2016, the FASB issued ASU 2016-13,
“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,”
which requires the measurement of all expected credit losses for financial assets held at the reporting date, based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
will now use forward-looking information to better inform their credit loss estimates. Additionally, the ASU amends the accounting guidance for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. We will adopt this guidance on January 1, 2020 and expect that it will have a material impact on the determination of our ALLL. We are unable to estimate the expected impact to the ALLL upon adoption due to various factors, primarily the fine tuning of our qualitative assumptions used within our preliminary model, uncertainty regarding economic conditions and the size and mix of our loan portfolio at the time of adoption, which could impact our historical loss factors. We are currently working with our existing ALLL software provider on further developing the model to perform the ALLL calculations upon adoption and we believe that we currently have in place the internal team capable of handling this implementation.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,”
which provides guidance for classification of specific items on the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance on January 1, 2018 and it did not have a material impact on our consolidated statement of cash flows.
In May 2017, the FASB issued ASU 2017-09,
“Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting,”
which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. This guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance on January 1, 2018 and it did not have an impact on our consolidated financial statements and disclosures.
In July 2018, the FASB issued ASU 2018-11,
“Leases (Topic 842): Targeted Improvements,”
which provides an additional transition method upon adoption of ASU 2016-02. The guidance allows an entity to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to beginning retained earnings in the period of adoption. This guidance is effective upon an entity's adoption of the leases standard. We plan to adopt this guidance on January 1, 2019 and expect it will not have a material impact on our consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,”
which amends the disclosure requirements related to fair value. The guidance removes disclosure related to transfers between Level 1 and Level 2 of the fair value hierarchy, the timing of these transfers and the valuation processes for Level 3 fair value measurements. Additional disclosures required as a result of adoption of this ASU will include the change in Level 3 unrealized gains and losses included in other comprehensive income and the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosure requirements until their effective date. We are currently evaluating this guidance to determine the date of adoption and impact on the Company.
Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. The Company recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company’s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are available to be issued.
The Company has evaluated events subsequent to the balance sheet date through the date these consolidated financial statements were filed with the SEC.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Fair Value Measurements
Under FASB ASC 820-10, we group assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
|
|
Level 1
|
Valuation is based upon quoted prices for identical instruments traded in active markets.
|
|
|
Level 2
|
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
|
|
|
Level 3
|
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
|
Risks with Fair Value Measurements
Fair value estimates are made at a discrete point in time based on relevant market information and other information about the financial instruments. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based in large part on judgments we make primarily regarding current economic conditions, risk characteristics of various financial instruments, prepayment rates, and future expected loss experience. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally, the occurrence of unexpected events or changes in circumstances can occur that could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to make changes to our previous estimates of fair value.
In addition, the fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of existing and anticipated future customer relationships and the value of assets and liabilities that are not considered financial instruments, such as premises and equipment and OREO.
Measurement Methodology
Cash and Cash Equivalents.
The fair value of cash and cash equivalents approximates its carrying value.
Interest-Bearing Deposits with Financial Institutions.
The fair values of interest-bearing deposits maturing within one year approximate their carrying values.
FHLB and FRBSF Stock.
The Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”) and the FRBSF. As members, we are required to own stock of the FHLB and the FRBSF, the amount of which is based primarily on the level of our borrowings from those institutions. We also have the right to acquire additional shares of stock in either or both of the FHLB and the FRBSF. During the year ended
December 31, 2017
, we purchased
378
shares, or
$38 thousand
, of FHLB stock and
6,334
shares, or
$317 thousand
, of FRBSF stock. During the year ended
December 31, 2018
, we purchased
$315 thousand
, or
3,143
shares of FHLB stock and
8,020
shares, or
$401 thousand
, of FRBSF stock.
No
shares of FHLB stock or FRBSF stock were called during the year ended
December 31, 2018
. During the year ended
December 31, 2017
,
8,354
shares, or
$418 thousand
, of FRBSF stock was called. The fair values of the FHLB and FRBSF stock are equal to their respective carrying amounts, are classified as restricted securities and are periodically evaluated for impairment based on our assessment of the ultimate recoverability of our investments in that stock. Any cash or stock dividends paid to us on such stock are reported as income.
Investment Securities Available for Sale.
Fair value measurement for our investment securities available for sale is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 investment securities include those traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 investment securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Equity Investments Without Readily Determinable Fair Value
. Equity investments without readily determinable fair value are accounted for under the measurement alternative method of accounting. These investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any cash or stock dividends paid to us on such investments are reported as noninterest income.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired Loans
. Loans measured for impairment are measured at an observable market price (if available), or the fair value of the loan’s collateral (if the loan is collateral dependent). The fair value of an impaired loan may be estimated using one of several methods, including collateral value, market value of similar debt, liquidation value and discounted cash flows. Those impaired loans not requiring a specific loan loss reserve represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the impaired loan at Level 2. When an appraised value is not available or we determine that the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the impaired loan at Level 3.
Loans
. The fair value for loans with variable interest rates less a credit discount is the carrying amount. The fair value of fixed rate loans is derived by calculating the present value of expected future cash flows discounted at the loan’s original interest rate by the various homogeneous categories of loans. All loans have been adjusted to reflect changes in credit risk and represent the exit price of the loans. Changes are not recorded directly as an adjustment to current earnings or comprehensive income, but rather as an adjustment component in determining the overall adequacy of the loan loss reserve.
Other Real Estate Owned.
OREO is reported at its net realizable value (fair value less estimated costs to sell) at the time any real estate collateral is acquired by the Bank in satisfaction of a loan. Subsequently, OREO is carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is determined based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the foreclosed asset at Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the foreclosed asset at Level 3.
Other Foreclosed Assets.
Other foreclosed assets are reported at their net realizable value (fair value less estimated costs to sell) at the time any collateral other than real estate is acquired by the Bank in satisfaction of a loan. Subsequently, other foreclosed assets are carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is determined based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the foreclosed asset at Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the foreclosed asset at Level 3.
Deposits.
Deposits are carried at historical cost. The carrying amounts of deposits from savings and money market accounts are deemed to approximate fair value as they either have no stated maturities or short-term maturities. Certificates of deposit are estimated utilizing discounted cash flow techniques. The interest rates applied are rates currently being offered for similar certificates of deposit.
Borrowings.
The fair value of borrowings is the carrying amount for those borrowings that mature on a daily basis. The fair value of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company. We classify our borrowings in Level 2 of the fair value hierarchy.
Junior Subordinated Debentures.
The fair value of the junior subordinated debentures is based on quoted market prices of the underlying securities. These securities are variable rate in nature and repriced quarterly. We classify our junior subordinated debentures in Level 2 of the fair value hierarchy.
Commitments to Extend Credit and Standby Letters of Credit.
The fair value of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Interest Receivable and Interest Payable.
The carrying amounts of our accrued interest receivable and accrued interest payable are deemed to approximate fair value.
Assets Recorded at Fair Value on a Recurring Basis
The following tables show the recorded amounts of assets and liabilities measured at fair value on a recurring basis at
December 31, 2018
and
2017
.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018
|
(Dollars in thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets at Fair Value:
|
|
|
|
|
|
|
|
Debt securities available for sale
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
2,980
|
|
|
$
|
—
|
|
|
$
|
2,980
|
|
|
$
|
—
|
|
Commercial mortgage backed securities issued by U.S. Agencies
|
4,534
|
|
|
—
|
|
|
4,534
|
|
|
—
|
|
Residential mortgage backed securities issued by U.S. agencies
|
23,717
|
|
|
—
|
|
|
23,717
|
|
|
—
|
|
Total debt securities available for sale at fair value
|
$
|
31,231
|
|
|
$
|
—
|
|
|
$
|
31,231
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
(Dollars in thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets at Fair Value:
|
|
|
|
|
|
|
|
Debt securities available for sale
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
2,971
|
|
|
$
|
—
|
|
|
$
|
2,971
|
|
|
$
|
—
|
|
Residential mortgage backed securities issued by U.S. agencies
|
30,122
|
|
|
—
|
|
|
30,122
|
|
|
—
|
|
Asset-backed security
(1)
|
1,741
|
|
|
—
|
|
|
—
|
|
|
1,741
|
|
Total debt securities available for sale
|
34,834
|
|
|
—
|
|
|
33,093
|
|
|
1,741
|
|
Equity securities
|
|
|
|
|
|
|
|
Mutual funds
(1)
|
4,904
|
|
|
4,904
|
|
|
—
|
|
|
—
|
|
Total debt and equity securities available for sale at fair value
|
$
|
39,738
|
|
|
$
|
4,904
|
|
|
$
|
33,093
|
|
|
$
|
1,741
|
|
|
|
(1)
|
These investments were sold during the year ended December 31, 2018. Refer to
Note 4, Investments
for further detail regarding these sales.
|
The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the
year
ended
December 31, 2018
:
|
|
|
|
|
|
Asset Backed Securities
|
|
(Dollars in thousands)
|
Balance of recurring Level 3 instruments at December 31, 2017
|
$
|
1,741
|
|
Total gains or losses (realized/unrealized):
|
|
Included in earnings-realized
|
53
|
|
Included in other comprehensive income
|
251
|
|
Sales
|
(2,054
|
)
|
Settlements
|
9
|
|
Balance of recurring Level 3 instruments at December 31, 2018
|
$
|
—
|
|
Assets Recorded at Fair Value on a Nonrecurring Basis
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Information regarding assets measured at fair value on a nonrecurring basis is set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018
|
|
At December 31, 2017
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets at Fair Value:
|
(Dollars in thousands)
|
|
|
Impaired loans
|
$
|
4,226
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,226
|
|
|
$
|
6,360
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,360
|
|
Other foreclosed assets
|
91
|
|
|
—
|
|
|
91
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other real estate owned
|
1,173
|
|
|
—
|
|
|
1,173
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
5,490
|
|
|
$
|
—
|
|
|
$
|
1,264
|
|
|
$
|
4,226
|
|
|
$
|
6,360
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,360
|
|
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant Unobservable Inputs and Valuation Techniques of Level 3 Fair Value Measurements
For our fair value measurements classified in Level 3 of the fair value hierarchy as of
December 31, 2018
, a summary of the significant unobservable inputs and valuation techniques is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of December 31, 2018
|
|
Valuation Techniques
|
|
Unobservable Inputs
|
|
Range
|
|
Weighted Average
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
4,226
|
|
|
Third-Party Pricing
|
|
Discounted cash flow
|
|
N/A
(2)
|
|
$
|
4,226
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As part of our process, we obtain appraisals for our various properties included within impaired loans which primarily rely upon market comparisons. These market comparisons support our assumption that the carrying value of the respective loans either requires or does not require additional impairment.
|
|
|
(2)
|
As of
December 31, 2018
, there has been no change to our valuation techniques or the types of unobservable inputs used in the calculation of fair value from December 31, 2017.
|
Fair Value Measurements for Other Financial Instruments
The table below provides estimated fair values and related carrying amounts of our financial instruments as of
December 31, 2018
and
December 31, 2017
, excluding financial assets and liabilities which are recorded at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
At December 31, 2018
|
|
At December 31, 2017
|
Carrying Value
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Carrying Value
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(Dollars in thousands)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
187,718
|
|
|
$
|
187,718
|
|
|
$
|
187,718
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
198,208
|
|
|
$
|
198,208
|
|
|
$
|
198,208
|
|
|
—
|
|
|
—
|
|
Interest-bearing deposits with financial institutions
|
2,420
|
|
|
2,420
|
|
|
2,420
|
|
|
—
|
|
|
—
|
|
|
2,920
|
|
|
2,920
|
|
|
2,920
|
|
|
—
|
|
|
—
|
|
Federal Reserve Bank of San Francisco and Federal Home Loan Bank stock
|
8,822
|
|
|
8,822
|
|
|
8,822
|
|
|
—
|
|
|
—
|
|
|
8,107
|
|
|
8,107
|
|
|
8,107
|
|
|
—
|
|
|
—
|
|
Loans, net
|
1,083,240
|
|
|
1,066,147
|
|
|
—
|
|
|
—
|
|
|
1,066,147
|
|
|
1,053,201
|
|
|
1,046,171
|
|
|
—
|
|
|
—
|
|
|
1,046,171
|
|
Accrued interest receivable
|
4,003
|
|
|
4,003
|
|
|
4,003
|
|
|
—
|
|
|
—
|
|
|
3,872
|
|
|
3,872
|
|
|
3,872
|
|
|
—
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
340,406
|
|
|
340,406
|
|
|
340,406
|
|
|
—
|
|
|
—
|
|
|
338,273
|
|
|
338,273
|
|
|
338,273
|
|
|
—
|
|
|
—
|
|
Interest-bearing deposits
|
795,596
|
|
|
794,321
|
|
|
—
|
|
|
794,321
|
|
|
—
|
|
|
801,120
|
|
|
800,169
|
|
|
—
|
|
|
800,169
|
|
|
—
|
|
Borrowings
|
40,000
|
|
|
39,976
|
|
|
—
|
|
|
39,976
|
|
|
—
|
|
|
40,866
|
|
|
41,238
|
|
|
—
|
|
|
41,238
|
|
|
—
|
|
Junior subordinated debentures
|
17,527
|
|
|
17,527
|
|
|
—
|
|
|
17,527
|
|
|
—
|
|
|
17,527
|
|
|
17,527
|
|
|
—
|
|
|
17,527
|
|
|
—
|
|
Accrued interest payable
|
361
|
|
|
361
|
|
|
361
|
|
|
—
|
|
|
—
|
|
|
397
|
|
|
397
|
|
|
397
|
|
|
—
|
|
|
—
|
|
4. Investments
Securities Available For Sale, at Fair Value
The following table sets forth the major components of securities available for sale and compares the amortized costs and estimated fair market values of, and the gross unrealized gains and losses on, these securities at
December 31, 2018
and
December 31, 2017
:
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2018
|
|
December 31, 2017
|
Amortized
Cost
|
|
Gross Unrealized
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
Estimated
Fair Value
|
Gain
|
|
Loss
|
|
Gain
|
|
Loss
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
2,999
|
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
|
$
|
2,980
|
|
|
$
|
2,996
|
|
|
$
|
—
|
|
|
$
|
(25
|
)
|
|
$
|
2,971
|
|
Commercial mortgage backed securities issued by U.S. Agencies
(1)
|
4,495
|
|
|
40
|
|
|
(1
|
)
|
|
4,534
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential mortgage backed securities issued by U.S. Agencies
(2)
|
24,739
|
|
|
1
|
|
|
(1,023
|
)
|
|
23,717
|
|
|
30,894
|
|
|
5
|
|
|
(777
|
)
|
|
30,122
|
|
Asset backed security
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,992
|
|
|
—
|
|
|
(251
|
)
|
|
1,741
|
|
Mutual funds
(4)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,000
|
|
|
11
|
|
|
(107
|
)
|
|
4,904
|
|
Total
|
$
|
32,233
|
|
|
$
|
41
|
|
|
$
|
(1,043
|
)
|
|
$
|
31,231
|
|
|
$
|
40,882
|
|
|
$
|
16
|
|
|
$
|
(1,160
|
)
|
|
$
|
39,738
|
|
|
|
(1)
|
Secured by first liens on commercial apartment building mortgages.
|
|
|
(2)
|
Secured by closed-end first liens on 1-4 family residential mortgages.
|
|
|
(3)
|
Comprised of a security that represented an interest in a pool of trust preferred securities issued by U.S.-based banks and insurance companies. This investment was sold during the year ended December 31, 2018.
|
|
|
(4)
|
Consisted primarily of mutual fund investments in closed-end first liens on 1-4 family residential mortgages. As a result of the adoption of ASU 2016-01 effective January 1, 2018, the change in fair value for all equity securities is required to be recorded within the income statement and would no longer be included in this table. However, this investment was sold during the year ended December 31, 2018 so the only impact from the adoption of ASU 2016-01 in 2018 relates to the adjustment to beginning retained earnings for the
$97 thousand
gross unrealized loss as of December 31, 2017.
|
At
December 31, 2018
and
2017
, U.S. agency mortgage backed securities and collateralized mortgage obligations with an aggregate fair market value of
$18.2 million
and
$22.7 million
, respectively, were pledged to secure FHLB borrowings, repurchase agreements, local agency deposits and treasury, tax and loan accounts.
The amortized cost and estimated fair values of securities available for sale at
December 31, 2018
and
December 31, 2017
are shown in the tables below by contractual maturities taking into consideration historical prepayments based on the prior twelve months of principal payments. Expected maturities will differ from contractual maturities and historical prepayments, particularly with respect to collateralized mortgage obligations, primarily because prepayment rates are affected by changes in conditions in the interest rate market and, therefore, future prepayment rates may differ from historical prepayment rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018 Maturing in
|
(Dollars in thousands)
|
One year
or less
|
|
Over one
year through
five years
|
|
Over five
years through
ten years
|
|
Over ten
Years
|
|
Total
|
Securities available for sale, amortized cost
|
$
|
7,874
|
|
|
$
|
13,466
|
|
|
$
|
9,971
|
|
|
$
|
922
|
|
|
$
|
32,233
|
|
Securities available for sale, estimated fair value
|
7,663
|
|
|
12,934
|
|
|
9,710
|
|
|
924
|
|
|
31,231
|
|
Weighted average yield
|
1.46
|
%
|
|
1.62
|
%
|
|
2.22
|
%
|
|
3.13
|
%
|
|
1.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017 Maturing in
|
(Dollars in thousands)
|
One year
or less
|
|
Over one
year through
five years
|
|
Over five
years through
ten years
|
|
Over ten
Years
|
|
Total
|
Securities available for sale, amortized cost
(1)
|
$
|
5,685
|
|
|
$
|
23,772
|
|
|
$
|
8,956
|
|
|
$
|
2,469
|
|
|
$
|
40,882
|
|
Securities available for sale, estimated fair value
(1)
|
5,543
|
|
|
23,253
|
|
|
8,727
|
|
|
2,215
|
|
|
39,738
|
|
Weighted average yield
(1)
|
1.49
|
%
|
|
1.60
|
%
|
|
1.63
|
%
|
|
3.86
|
%
|
|
1.73
|
%
|
|
|
(1)
|
Included within these balances are equity securities that consisted primarily of mutual fund investments in closed-end first liens on 1-4 family residential mortgages. As a result of the adoption of ASU 2016-01 effective January 1, 2018, the change in fair value for all equity securities is required to be recorded within the income statement and would no longer be included in this table. However, this investment was sold during the year ended December 31, 2018 so the only impact from the adoption of ASU 2016-01 in 2018 relates to the adjustment to beginning retained earnings for the
$97 thousand
gross unrealized loss as of December 31, 2017.
|
During the years ended
December 31, 2018
and 2017, we purchased
$4.5 million
and
$3.0 million
, respectively, of securities available for sale.
No
securities available for sale were purchased during the year ended December 31, 2016. During the years ended
December 31, 2018
and 2017, we had
$2.1 million
and
$382 thousand
, respectively, of proceeds from sales of securities
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
available for sale, for a total net gain of
$53 thousand
and net loss of
$4 thousand
, respectively. We had
no
sales of securities available for sale during the year ended December 31, 2016.
The tables below indicate, as of
December 31, 2018
and
December 31, 2017
, the gross unrealized losses and fair values of our investments, aggregated by investment category, and length of time that the individual securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with Unrealized Loss at December 31, 2018
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
(Dollars in thousands)
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
U.S. Treasury securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,980
|
|
|
$
|
(19
|
)
|
|
$
|
2,980
|
|
|
$
|
(19
|
)
|
Commercial mortgage backed securities issued by U.S. Agencies
|
999
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
999
|
|
|
(1
|
)
|
Residential mortgage backed securities issued by U.S. Agencies
|
361
|
|
|
(3
|
)
|
|
23,299
|
|
|
(1,020
|
)
|
|
23,660
|
|
|
(1,023
|
)
|
Total
|
$
|
1,360
|
|
|
$
|
(4
|
)
|
|
$
|
26,279
|
|
|
$
|
(1,039
|
)
|
|
$
|
27,639
|
|
|
$
|
(1,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with Unrealized Loss at December 31, 2017
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
(Dollars in thousands)
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
U.S. Treasury securities
|
$
|
2,971
|
|
|
$
|
(25
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,971
|
|
|
$
|
(25
|
)
|
Residential mortgage backed securities issued by U.S. Agencies
|
1,400
|
|
|
(15
|
)
|
|
28,241
|
|
|
(762
|
)
|
|
29,641
|
|
|
(777
|
)
|
Asset-backed security
|
—
|
|
|
—
|
|
|
1,740
|
|
|
(251
|
)
|
|
1,740
|
|
|
(251
|
)
|
Mutual funds
(1)
|
1,485
|
|
|
(15
|
)
|
|
2,658
|
|
|
(92
|
)
|
|
4,143
|
|
|
(107
|
)
|
Total
|
$
|
5,856
|
|
|
$
|
(55
|
)
|
|
$
|
32,639
|
|
|
$
|
(1,105
|
)
|
|
$
|
38,495
|
|
|
$
|
(1,160
|
)
|
|
|
(1)
|
Consisted primarily of mutual fund investments in closed-end first liens on 1-4 family residential mortgages. As a result of the adoption of ASU 2016-01 effective January 1, 2018, the change in fair value for all equity securities is required to be recorded within the income statement and would no longer be included in this table. However, this investment was sold during the year ended December 31, 2018 so the only impact from the adoption of ASU 2016-01 in 2018 relates to the adjustment to beginning retained earnings for the
$97 thousand
gross unrealized loss as of December 31, 2017.
|
We regularly monitor investments for significant declines in fair value. We have determined that declines in the fair values of these investments below their respective amortized costs, as set forth in the tables above, are temporary because (i) those declines were due to interest rate changes and not to a deterioration in the creditworthiness of the issuers of those investment securities, and (ii) we have the ability to hold those securities until there is a recovery in their values or until their maturity.
Through the impairment assessment process, we determined that there were no available-for-sale debt securities that were other-than-temporarily impaired at
December 31, 2018
. We recorded
no
impairment credit losses on available-for-sale debt securities in our consolidated statements of operations for the
year ended
December 31, 2018
and
2017
.
We have made a determination that the remainder of our securities with respect to which there were unrealized losses as of
December 31, 2018
are not other-than-temporarily impaired, because we have concluded that we have the ability to continue to hold those securities until their respective fair market values increase above their respective amortized costs or, if necessary, until their respective maturities. In reaching that conclusion we considered a number of factors and other information, which included: (i) the significance of each such security, (ii) the amount of the unrealized losses attributable to each such security, (iii) our liquidity position, (iv) the impact that retention of those securities could have on our capital position and (v) our evaluation of the expected future performance of these securities (based on the criteria discussed above).
Equity Investments Without Readily Determinable Fair Value
As of
December 31, 2018
, we had
two
investments in limited partnerships without a readily determinable fair value. As of
December 31, 2018
, we owned less than 3% of the total investment in each partnership. Under ASU 2016-01, we elected to measure these equity investments using the measurement alternative, which requires that these investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. During the
year ended
ended
December 31, 2018
, these investments were not impaired and there were no observable price changes. As a result, the balance shown below as of
December 31, 2018
represents the cost
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the investments and is included within other assets on the consolidated statements of financial condition. Prior to the adoption of ASU 2016-01, these investments were accounted for under the cost method of accounting and included within other assets on the consolidated statements of financial condition. During the
year ended
December 31, 2018
, we had
$364 thousand
of capital contributions to these investments, partially offset by
$17 thousand
return of principal. We had
$227 thousand
of capital contributions to these investments during the
year ended
December 31, 2017
. As of
December 31, 2018
and
December 31, 2017
, our equity investments without readily determinable fair value were as follows:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
(Dollars in thousands)
|
Equity investments without readily determinable fair value
|
$
|
1,240
|
|
|
$
|
893
|
|
5. Loans and Allowance for Loan and Lease Losses
The loan portfolio consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
(Dollars in thousands)
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Commercial loans
|
$
|
444,441
|
|
|
40.6
|
%
|
|
$
|
394,493
|
|
|
37.1
|
%
|
Commercial real estate loans – owner occupied
|
211,645
|
|
|
19.3
|
%
|
|
214,365
|
|
|
20.1
|
%
|
Commercial real estate loans – all other
|
226,441
|
|
|
20.7
|
%
|
|
228,090
|
|
|
21.4
|
%
|
Residential mortgage loans – multi-family
|
97,173
|
|
|
8.9
|
%
|
|
114,302
|
|
|
10.7
|
%
|
Residential mortgage loans – single family
|
21,176
|
|
|
1.9
|
%
|
|
24,848
|
|
|
2.3
|
%
|
Construction and land development loans
|
38,496
|
|
|
3.5
|
%
|
|
34,614
|
|
|
3.3
|
%
|
Consumer loans
|
54,514
|
|
|
5.0
|
%
|
|
53,918
|
|
|
5.1
|
%
|
Gross loans
|
1,093,886
|
|
|
100.0
|
%
|
|
1,064,630
|
|
|
100.0
|
%
|
Deferred fee (income) costs, net
|
2,860
|
|
|
|
|
2,767
|
|
|
|
Allowance for loan and lease losses
|
(13,506
|
)
|
|
|
|
(14,196
|
)
|
|
|
Loans, net
|
$
|
1,083,240
|
|
|
|
|
$
|
1,053,201
|
|
|
|
At
December 31, 2018
and
2017
, real estate loans of approximately
$807 million
and
$669 million
, respectively, were pledged to secure borrowings obtained from the FHLB. During the year ended
December 31, 2018
, we sold
$15.1 million
of commercial real estate loans - all other at par value.
No
loans were sold during the years ended December 31,
2017
or
2016
. We purchased
$10.0 million
of performing commercial real estate - owner occupied, commercial real estate - all other and residential mortgage - multifamily loans during the year ended
December 31, 2018
,
$30.1 million
of performing commercial real estate - owner occupied and commercial real estate - all other loans during the year ended December 31,
2017
and
$85.8 million
of performing residential multi-family mortgage and commercial real estate - all other loans during the year ended December 31,
2016
.
Allowance for Loan and Lease Losses
The ALLL represents our estimate of credit losses in our loan and lease portfolio that are probable and estimable at the balance sheet date. We employ economic models that are based on bank regulatory guidelines, industry standards and our own historical loan loss experience, as well as a number of more subjective qualitative factors, to determine both the sufficiency of the ALLL and the amount of the provisions that are required to increase or replenish the ALLL.
The ALLL is first determined by (i) analyzing all classified loans (graded as “Substandard” or “Doubtful” under our internal asset quality grading parameters) on non-accrual status for loss exposure and (ii) establishing specific reserves as needed. ASC 310-10 defines loan impairment as the existence of uncertainty concerning collection of all principal and interest in accordance with the contractual terms of a loan. For collateral dependent loans, impairment is typically measured by comparing the loan amount to the fair value of collateral, less estimated costs to sell, with any “shortfall” amount charged off. Other methods can be used in estimating impairment, including market price and the present value of expected future cash flows discounted at the loan’s original interest rate. We are an active lender with the U.S. Small Business Administration and collection of a percentage of the loan balance of many of the loans originated is guaranteed. The ALLL reserves are calculated against the non-guaranteed loan balances.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On a quarterly basis, we utilize a classification based loan loss migration model as well as review individual loans in determining the adequacy of the ALLL for homogenous pools of loans that are not subject to specific reserve allocations. Our loss migration analysis utilizes a series of nineteen staggered 16-quarter migration periods of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans (automobile, mortgage and credit cards). We then apply these calculated loss factors, together with qualitative factors based on external economic conditions and trends and internal assessments, to the outstanding loan balances in each homogenous group of loans, and then, using our internal asset quality grading parameters, we grade the loans as “Pass,” “Special Mention,” “Substandard” or “Doubtful”. We analyze impaired loans individually. This grading is based on the credit classifications of assets as prescribed by government regulations and industry standards and is separated into the following groups:
|
|
•
|
Pass: Loans classified as pass include current loans performing in accordance with contractual terms, installment/consumer loans that are not individually risk rated, and loans which exhibit certain risk factors that require greater than usual monitoring by management.
|
|
|
•
|
Special Mention: Loans classified as special mention, while generally not delinquent, have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date.
|
|
|
•
|
Substandard: Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
|
|
|
•
|
Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard loan, and may also be at delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable.
|
Set forth below is a summary of the activity in the ALLL, by portfolio type, during the years ended
December 31, 2018
,
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Commercial
|
|
Real Estate
|
|
Construction and Land
Development
|
|
Consumer and
Single Family
Mortgages
|
|
Unallocated
|
|
Total
|
ALLL in the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
9,155
|
|
|
$
|
2,906
|
|
|
$
|
650
|
|
|
$
|
1,043
|
|
|
$
|
442
|
|
|
$
|
14,196
|
|
Charge offs
|
(2,757
|
)
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
(2,765
|
)
|
Recoveries
|
1,959
|
|
|
69
|
|
|
—
|
|
|
47
|
|
|
—
|
|
|
2,075
|
|
Provision
|
(286
|
)
|
|
668
|
|
|
(224
|
)
|
|
208
|
|
|
(366
|
)
|
|
—
|
|
Balance at end of year
|
$
|
8,071
|
|
|
$
|
3,643
|
|
|
$
|
426
|
|
|
$
|
1,290
|
|
|
$
|
76
|
|
|
$
|
13,506
|
|
ALLL in the year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
11,276
|
|
|
$
|
4,226
|
|
|
$
|
343
|
|
|
$
|
642
|
|
|
$
|
314
|
|
|
$
|
16,801
|
|
Charge offs
|
(4,124
|
)
|
|
(432
|
)
|
|
—
|
|
|
(179
|
)
|
|
—
|
|
|
(4,735
|
)
|
Recoveries
|
1,852
|
|
|
72
|
|
|
27
|
|
|
179
|
|
|
—
|
|
|
2,130
|
|
Provision
|
151
|
|
|
(960
|
)
|
|
280
|
|
|
401
|
|
|
128
|
|
|
—
|
|
Balance at end of year
|
$
|
9,155
|
|
|
$
|
2,906
|
|
|
$
|
650
|
|
|
$
|
1,043
|
|
|
$
|
442
|
|
|
$
|
14,196
|
|
ALLL in the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
6,639
|
|
|
$
|
5,109
|
|
|
$
|
282
|
|
|
$
|
686
|
|
|
$
|
—
|
|
|
$
|
12,716
|
|
Charge offs
|
(15,390
|
)
|
|
(1,119
|
)
|
|
—
|
|
|
(540
|
)
|
|
—
|
|
|
(17,049
|
)
|
Recoveries
|
1,189
|
|
|
1
|
|
|
57
|
|
|
17
|
|
|
—
|
|
|
1,264
|
|
Provision
|
18,838
|
|
|
235
|
|
|
4
|
|
|
479
|
|
|
314
|
|
|
19,870
|
|
Balance at end of year
|
$
|
11,276
|
|
|
$
|
4,226
|
|
|
$
|
343
|
|
|
$
|
642
|
|
|
$
|
314
|
|
|
$
|
16,801
|
|
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of
December 31, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Commercial
|
|
Real Estate
|
|
Land
Development
|
|
Consumer and
Single Family
Mortgages
|
|
Unallocated
|
|
Total
|
ALLL balance at December 31, 2018 related to:
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loans collectively evaluated for impairment
|
$
|
8,071
|
|
|
$
|
3,643
|
|
|
$
|
426
|
|
|
$
|
1,290
|
|
|
$
|
76
|
|
|
$
|
13,506
|
|
Total
|
$
|
8,071
|
|
|
$
|
3,643
|
|
|
$
|
426
|
|
|
$
|
1,290
|
|
|
$
|
76
|
|
|
$
|
13,506
|
|
Loans balance at December 31, 2018 related to:
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
3,352
|
|
|
$
|
831
|
|
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
4,226
|
|
Loans collectively evaluated for impairment
|
441,089
|
|
|
534,428
|
|
|
38,496
|
|
|
75,647
|
|
|
—
|
|
|
1,089,660
|
|
Total
|
$
|
444,441
|
|
|
$
|
535,259
|
|
|
$
|
38,496
|
|
|
$
|
75,690
|
|
|
$
|
—
|
|
|
$
|
1,093,886
|
|
ALLL balance at December 31, 2017 related to:
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
|
Loans collectively evaluated for impairment
|
$
|
9,148
|
|
|
$
|
2,906
|
|
|
$
|
650
|
|
|
$
|
1,043
|
|
|
$
|
442
|
|
|
$
|
14,189
|
|
Total
|
$
|
9,155
|
|
|
$
|
2,906
|
|
|
$
|
650
|
|
|
$
|
1,043
|
|
|
$
|
442
|
|
|
$
|
14,196
|
|
Loans balance at December 31, 2017 related to:
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
3,672
|
|
|
$
|
2,461
|
|
|
$
|
—
|
|
|
$
|
227
|
|
|
$
|
—
|
|
|
$
|
6,360
|
|
Loans collectively evaluated for impairment
|
390,821
|
|
|
554,296
|
|
|
34,614
|
|
|
78,539
|
|
|
—
|
|
|
1,058,270
|
|
Total
|
$
|
394,493
|
|
|
$
|
556,757
|
|
|
$
|
34,614
|
|
|
$
|
78,766
|
|
|
$
|
—
|
|
|
$
|
1,064,630
|
|
Credit Quality
The amounts of nonperforming assets and delinquencies that occur within our loan portfolio factors in our evaluation of the adequacy of the ALLL.
The following table provides a summary of the delinquency status of loans by portfolio type at
December 31, 2018
and
2017
:
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
90 Days and Greater
|
|
Total Past Due
|
|
Current
|
|
Total Loans Outstanding
|
|
Loans >90 Days and Accruing
|
At December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
$
|
—
|
|
|
$
|
3,705
|
|
|
$
|
4,273
|
|
|
$
|
7,978
|
|
|
$
|
436,463
|
|
|
$
|
444,441
|
|
|
$
|
1,278
|
|
Commercial real estate loans – owner-occupied
|
—
|
|
|
831
|
|
|
—
|
|
|
831
|
|
|
210,814
|
|
|
211,645
|
|
|
—
|
|
Commercial real estate loans – all other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
226,441
|
|
|
226,441
|
|
|
—
|
|
Residential mortgage loans – multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
97,173
|
|
|
97,173
|
|
|
—
|
|
Residential mortgage loans – single family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,176
|
|
|
21,176
|
|
|
—
|
|
Land development loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
38,496
|
|
|
38,496
|
|
|
—
|
|
Consumer loans
|
13
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
54,501
|
|
|
54,514
|
|
|
—
|
|
Total
|
$
|
13
|
|
|
$
|
4,536
|
|
|
$
|
4,273
|
|
|
$
|
8,822
|
|
|
$
|
1,085,064
|
|
|
$
|
1,093,886
|
|
|
$
|
1,278
|
|
At December 31, 2017
|
|
Commercial loans
|
$
|
1,387
|
|
|
$
|
—
|
|
|
$
|
2,125
|
|
|
$
|
3,512
|
|
|
$
|
390,981
|
|
|
$
|
394,493
|
|
|
$
|
—
|
|
Commercial real estate loans – owner-occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
214,365
|
|
|
214,365
|
|
|
—
|
|
Commercial real estate loans – all other
|
—
|
|
|
936
|
|
|
—
|
|
|
936
|
|
|
227,154
|
|
|
228,090
|
|
|
—
|
|
Residential mortgage loans – multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
114,302
|
|
|
114,302
|
|
|
—
|
|
Residential mortgage loans – single family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,848
|
|
|
24,848
|
|
|
—
|
|
Land development loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34,614
|
|
|
34,614
|
|
|
—
|
|
Consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
53,918
|
|
|
53,918
|
|
|
—
|
|
Total
|
$
|
1,387
|
|
|
$
|
936
|
|
|
$
|
2,125
|
|
|
$
|
4,448
|
|
|
$
|
1,060,182
|
|
|
$
|
1,064,630
|
|
|
$
|
—
|
|
Generally, the accrual of interest on a loan is discontinued when principal or interest payments become more than 90 days past due, unless we believe that the loan is adequately collateralized and it is in the process of collection. There were
$1.3 million
loans 90 days or more past due and still accruing interest at
December 31, 2018
and
none
outstanding at
December 31, 2017
. In certain instances, when a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case such payments are applied to accrued and unpaid interest, which is credited to income. Non-accrual loans may be restored to accrual status when principal and interest become current and full repayment becomes expected.
The following table provides information with respect to loans on nonaccrual status, by portfolio type, as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
(Dollars in thousands)
|
Nonaccrual loans:
|
|
|
|
Commercial loans
|
$
|
3,352
|
|
|
$
|
3,222
|
|
Commercial real estate loans – owner occupied
|
831
|
|
|
893
|
|
Commercial real estate loans – all other
|
—
|
|
|
1,568
|
|
Residential mortgage loans – single family
|
—
|
|
|
171
|
|
Consumer loans
|
43
|
|
|
56
|
|
Total
(1)
|
$
|
4,226
|
|
|
$
|
5,910
|
|
(1) Nonaccrual loans may include loans that are currently considered performing loans.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We classify our loan portfolio using internal credit quality ratings. The following table provides a summary of loans by portfolio type and our internal credit quality ratings as of
December 31, 2018
and
2017
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
2018
|
|
2017
|
|
Increase
(Decrease)
|
Pass:
|
|
|
|
|
|
Commercial loans
|
$
|
428,287
|
|
|
$
|
375,024
|
|
|
$
|
53,263
|
|
Commercial real estate loans – owner occupied
|
205,914
|
|
|
207,094
|
|
|
(1,180
|
)
|
Commercial real estate loans – all other
|
226,441
|
|
|
226,522
|
|
|
(81
|
)
|
Residential mortgage loans – multi family
|
97,173
|
|
|
114,302
|
|
|
(17,129
|
)
|
Residential mortgage loans – single family
|
21,176
|
|
|
24,677
|
|
|
(3,501
|
)
|
Construction and land development loans
|
38,496
|
|
|
34,614
|
|
|
3,882
|
|
Consumer loans
|
54,415
|
|
|
53,862
|
|
|
553
|
|
Total pass loans
|
$
|
1,071,902
|
|
|
$
|
1,036,095
|
|
|
$
|
35,807
|
|
Special Mention:
|
|
|
|
|
|
Commercial loans
|
$
|
10,411
|
|
|
$
|
11,009
|
|
|
$
|
(598
|
)
|
Commercial real estate loans – owner occupied
|
4,900
|
|
|
6,378
|
|
|
(1,478
|
)
|
Total special mention loans
|
$
|
15,311
|
|
|
$
|
17,387
|
|
|
$
|
(2,076
|
)
|
Substandard:
|
|
|
|
|
|
Commercial loans
|
$
|
5,743
|
|
|
$
|
8,094
|
|
|
$
|
(2,351
|
)
|
Commercial real estate loans – owner occupied
|
831
|
|
|
893
|
|
|
(62
|
)
|
Commercial real estate loans – all other
|
—
|
|
|
1,568
|
|
|
(1,568
|
)
|
Residential mortgage loans – single family
|
—
|
|
|
171
|
|
|
(171
|
)
|
Consumer loans
|
99
|
|
|
56
|
|
|
43
|
|
Total substandard loans
|
$
|
6,673
|
|
|
$
|
10,782
|
|
|
$
|
(4,109
|
)
|
Doubtful:
|
|
|
|
|
|
Commercial loans
|
$
|
—
|
|
|
$
|
366
|
|
|
$
|
(366
|
)
|
Total doubtful loans
|
$
|
—
|
|
|
$
|
366
|
|
|
$
|
(366
|
)
|
Total Loans:
|
$
|
1,093,886
|
|
|
$
|
1,064,630
|
|
|
$
|
29,256
|
|
Impaired Loans
A loan generally is classified as impaired and placed on nonaccrual status when, in our opinion, principal or interest is not likely to be collected in accordance with the contractual terms of the loan agreement. We measure for impairments on a loan-by-loan basis, using either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent.
The following table sets forth information regarding impaired loans, at
December 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
2018
|
|
2017
|
Impaired loans:
|
|
Nonaccruing loans
|
$
|
4,226
|
|
|
$
|
5,101
|
|
Nonaccruing restructured loans
|
—
|
|
|
809
|
|
Accruing restructured loans
(1)
|
—
|
|
|
450
|
|
Total impaired loans
|
$
|
4,226
|
|
|
$
|
6,360
|
|
Impaired loans less than 90 days delinquent and included in total impaired loans
|
$
|
1,359
|
|
|
$
|
3,994
|
|
|
|
(1)
|
See "Troubled Debt Restructurings" below for a description of accruing restructured loans at
December 31, 2018
and
December 31, 2017
.
|
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below contains additional information with respect to impaired loans, by portfolio type, as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Recorded Investment
|
|
Unpaid Principal Balance
|
|
Related Allowance (1)
|
|
Recorded Investment
|
|
Unpaid Principal Balance
|
|
Related Allowance (1)
|
|
(Dollars in thousands)
|
No allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
$
|
3,352
|
|
|
$
|
4,516
|
|
|
$
|
—
|
|
|
$
|
3,222
|
|
|
$
|
5,910
|
|
|
$
|
—
|
|
Commercial real estate loans – owner occupied
|
831
|
|
|
925
|
|
|
—
|
|
|
893
|
|
|
945
|
|
|
—
|
|
Commercial real estate loans – all other
|
—
|
|
|
—
|
|
|
—
|
|
|
1,568
|
|
|
1,965
|
|
|
—
|
|
Residential mortgage loans – single family
|
—
|
|
|
—
|
|
|
—
|
|
|
171
|
|
|
185
|
|
|
—
|
|
Consumer loans
|
43
|
|
|
65
|
|
|
—
|
|
|
56
|
|
|
73
|
|
|
—
|
|
Total
|
4,226
|
|
|
5,506
|
|
|
—
|
|
|
5,910
|
|
|
9,078
|
|
|
—
|
|
With allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
450
|
|
|
$
|
450
|
|
|
$
|
7
|
|
Total
|
—
|
|
|
—
|
|
|
—
|
|
|
450
|
|
|
450
|
|
|
7
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
$
|
3,352
|
|
|
$
|
4,516
|
|
|
$
|
—
|
|
|
$
|
3,672
|
|
|
$
|
6,360
|
|
|
$
|
7
|
|
Commercial real estate loans – owner occupied
|
831
|
|
|
925
|
|
|
—
|
|
|
893
|
|
|
945
|
|
|
—
|
|
Commercial real estate loans – all other
|
—
|
|
|
—
|
|
|
—
|
|
|
1,568
|
|
|
1,965
|
|
|
—
|
|
Residential mortgage loans – single family
|
—
|
|
|
—
|
|
|
—
|
|
|
171
|
|
|
185
|
|
|
—
|
|
Consumer loans
|
43
|
|
|
65
|
|
|
—
|
|
|
56
|
|
|
73
|
|
|
—
|
|
Total
|
4,226
|
|
|
5,506
|
|
|
—
|
|
|
6,360
|
|
|
9,528
|
|
|
7
|
|
|
|
(1)
|
When the discounted cash flows, collateral value or market price equals or exceeds the recorded investment in the loan, then specific reserves are not required to be set aside for the loan within the ALLL. This typically occurs when the impaired loans have been partially charged-off and/or there have been interest payments received and applied to the balance of the principal outstanding.
|
At
December 31, 2018
and
December 31, 2017
, there were
$4.2 million
and
$5.9 million
, respectively, of impaired loans for which no specific reserves had been allocated because these loans, in our judgment, were sufficiently collateralized. Of the impaired loans at
December 31, 2018
for which no specific reserves were allocated,
$874 thousand
had been deemed impaired in the prior year.
Average balances and interest income recognized on impaired loans, by portfolio type, for the
year ended
December 31, 2018
,
2017
and
2016
were as follows:
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Average Balance
|
|
Interest Income Recognized
|
|
Average Balance
|
|
Interest Income Recognized
|
|
Average Balance
|
|
Interest Income Recognized
|
|
|
|
|
|
|
No allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
$
|
4,289
|
|
|
$
|
101
|
|
|
$
|
10,178
|
|
|
$
|
128
|
|
|
$
|
13,686
|
|
|
$
|
437
|
|
Commercial real estate loans – owner occupied
|
856
|
|
|
—
|
|
|
1,215
|
|
|
—
|
|
|
2,455
|
|
|
3
|
|
Commercial real estate loans – all other
|
370
|
|
|
—
|
|
|
1,616
|
|
|
—
|
|
|
4,413
|
|
|
—
|
|
Residential mortgage loans – multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
350
|
|
|
—
|
|
Residential mortgage loans – single family
|
—
|
|
|
—
|
|
|
183
|
|
|
—
|
|
|
339
|
|
|
9
|
|
Construction and land development loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
871
|
|
|
—
|
|
Consumer loans
|
48
|
|
|
—
|
|
|
80
|
|
|
5
|
|
|
173
|
|
|
—
|
|
Total
|
5,563
|
|
|
101
|
|
|
13,272
|
|
|
133
|
|
|
22,287
|
|
|
449
|
|
With allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
96
|
|
|
—
|
|
|
3,150
|
|
|
33
|
|
|
4,728
|
|
|
457
|
|
Commercial real estate loans – owner occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
962
|
|
|
—
|
|
Total
|
96
|
|
|
—
|
|
|
3,150
|
|
|
33
|
|
|
5,690
|
|
|
457
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
4,385
|
|
|
101
|
|
|
13,328
|
|
|
161
|
|
|
18,414
|
|
|
894
|
|
Commercial real estate loans – owner occupied
|
856
|
|
|
—
|
|
|
1,215
|
|
|
—
|
|
|
3,417
|
|
|
3
|
|
Commercial real estate loans – all other
|
370
|
|
|
—
|
|
|
1,616
|
|
|
—
|
|
|
4,413
|
|
|
—
|
|
Residential mortgage loans – multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
350
|
|
|
—
|
|
Residential mortgage loans – single family
|
—
|
|
|
—
|
|
|
183
|
|
|
—
|
|
|
339
|
|
|
9
|
|
Construction and land development loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
871
|
|
|
—
|
|
Consumer loans
|
48
|
|
|
—
|
|
|
80
|
|
|
5
|
|
|
173
|
|
|
—
|
|
Total
|
$
|
5,659
|
|
|
$
|
101
|
|
|
$
|
16,422
|
|
|
$
|
166
|
|
|
$
|
27,977
|
|
|
$
|
906
|
|
The interest that would have been earned had the impaired loans remained current in accordance with their original terms was
$362 thousand
in
2018
,
$462 thousand
in
2017
and
$1.2 million
in
2016
.
Troubled Debt Restructurings
Pursuant to the FASB's ASU No. 2011-2,
A Creditor's Determination of whether a Restructuring is a Troubled Debt Restructuring
, the Company's TDRs totaled
$0
and
$1.3 million
at
December 31, 2018
and
December 31, 2017
, respectively. TDRs consist of loans to which modifications have been made for the purpose of alleviating temporary impairments of the borrower's financial condition and cash flows. Those modifications have come in the forms of changes in amortization terms, reductions in interest rates, interest only payments and, in limited cases, concessions to outstanding loan balances. The modifications are made as part of workout plans we enter into with the borrower that are designed to provide a bridge for the borrower's cash flow shortfalls in the near term. If a borrower works through the near term issues, then in most cases, the original contractual terms of the borrower's loan will be reinstated.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents loans restructured as TDRs during the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
(Dollars in thousands)
|
Number of
loans
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
Number of
loans
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
Number of
loans
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
Post-Modification
Outstanding
Recorded
Investment
|
Performing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
450
|
|
|
$
|
450
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
450
|
|
|
450
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Nonperforming
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1,329
|
|
|
809
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1,329
|
|
|
809
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total troubled debt restructurings
(1)
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2
|
|
|
$
|
1,779
|
|
|
$
|
1,259
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
No loans were restructured during the years ended December 31, 2018 or December 31, 2016.
|
During the years ended
December 31, 2018
,
2017
and
2016
, TDRs that were modified within the preceding 12-month period which subsequently defaulted were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Number of loans
|
|
Recorded Investment
|
|
Number of loans
|
|
Recorded Investment
|
|
Number of loans
|
|
Recorded Investment
|
|
(Dollars in thousands)
|
|
|
|
|
Commercial real estate - owner occupied
(1)
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
753
|
|
|
|
(1)
|
During the years ended December 31, 2018 or December 31, 2017, no TDRs were modified within the preceding 12-month period which subsequently defaulted.
|
6. Premises and Equipment
The major classes of premises and equipment are as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31,
|
2018
|
|
2017
|
Furniture and equipment
|
$
|
3,170
|
|
|
$
|
6,549
|
|
Leasehold improvements
|
42
|
|
|
23
|
|
|
3,212
|
|
|
6,572
|
|
Accumulated depreciation and amortization
|
(2,173
|
)
|
|
(5,478
|
)
|
Total
|
$
|
1,039
|
|
|
$
|
1,094
|
|
The amount of depreciation and amortization included in operating expense was
$405,000
,
$428,000
and
$485,000
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
7. Deposits
Asset
At
December 31, 2018
, we had
$174.5 million
in interest bearing deposits at other financial institutions, as compared to
$186.0 million
at
December 31, 2017
. The weighted average percentage yields on these deposits for each of the years ended
December 31, 2018
and
December 31, 2017
was
1.92%
and
1.12%
, respectively. Interest bearing deposits with financial institutions can be withdrawn on demand and are considered cash equivalents for purposes of the consolidated statements of cash flows.
At
December 31, 2018
and
December 31, 2017
, we had
$2.4 million
and
$2.9 million
, respectively, of interest-bearing time deposits at other financial institutions, which were scheduled to mature within one year or had no stated maturity date. The
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
weighted average percentage yields on these deposits were
2.04%
and
1.07%
for the years ended
December 31, 2018
and
December 31, 2017
, respectively.
Liability
The aggregate amount of time deposits in denominations of $250,000 or more at
December 31, 2018
and
2017
was
$95.2 million
and
$94.1 million
, respectively.
The scheduled maturities of time deposits in denominations of $250,000 or more at
December 31, 2018
were as follows:
|
|
|
|
|
(Dollars in thousands)
|
At December 31, 2018
|
2019
|
$
|
93,898
|
|
2020
|
5,340
|
|
2021
|
254
|
|
2022
|
2,462
|
|
2023 and beyond
|
250
|
|
Total
|
$
|
102,204
|
|
8. Borrowings and Contractual Obligations
At
December 31, 2018
and
2017
, our borrowings and contractual obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
2018
|
|
2017
|
FHLB advances—short-term
|
$
|
40,000
|
|
|
$
|
40,000
|
|
Other borrowings—short-term
(1)
|
—
|
|
|
866
|
|
Total
|
$
|
40,000
|
|
|
$
|
40,866
|
|
|
|
(1)
|
Borrowings had an interest rate of
15%
as of December 31, 2017. This represented the portion of a participated loan that was required under GAAP to be recorded as other borrowings as of December 31, 2017. The participated portion of this loan was repurchased during the first quarter of 2018 and is no longer required to be recorded in other borrowings.
|
The table below sets forth the amounts of, the interest rates we pay on, and the maturity dates of these FHLB borrowings. These borrowings had a weighted-average annualized interest rate of
2.54%
for the year ended
December 31, 2018
.
|
|
|
|
|
|
|
|
Principal Amounts
|
|
Interest Rate
|
|
Maturity Dates
|
(Dollars in thousands)
|
10,000
|
|
|
2.31
|
%
|
|
January 15, 2019
|
10,000
|
|
|
2.55
|
%
|
|
March 4, 2019
|
10,000
|
|
|
2.66
|
%
|
|
May 28, 2019
|
10,000
|
|
|
2.65
|
%
|
|
June 26, 2019
|
At
December 31, 2018
,
$807 million
of loans were pledged to support our FHLB borrowings and our unfunded borrowing capacity. As of
December 31, 2018
, we had unused borrowing capacity of
$365 million
with the FHLB. The highest amount of borrowings outstanding at any month-end during the year ended
December 31, 2018
was
$40.9 million
.
As of
December 31, 2017
, we had
$40.0 million
of outstanding short-term borrowings and
no
outstanding long-term borrowings that we had obtained from the FHLB. These borrowings had a weighted-average annualized interest rate of
1.65%
for the year ended
December 31, 2017
. As of
December 31, 2017
we had unused borrowing capacity of
$285 million
with the FHLB. The highest amount of borrowings outstanding at any month-end during the year ended
December 31, 2017
was
$40.9 million
.
These FHLB borrowings were obtained in accordance with the Company’s asset/liability management objective to reduce the Company’s exposure to interest rate fluctuations and increase our contingent funding.
Junior Subordinated Debentures
. We formed
two
grantor trusts to sell and issue to institutional investors floating junior trust preferred securities ("trust preferred securities"). The net proceeds from the sales of the trust preferred securities was used in exchange for our issuance to the grantor trusts for the principal amount of our junior subordinated floating rate debentures (the "Debentures"). The payment terms of the Debentures are used by the grantor trusts to make the payments that come due to the
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
holders of the trust preferred securities pursuant to the terms of those securities. The Debentures also were pledged by the grantor trusts as security for the payment obligations of the grantor trusts under the trust preferred securities.
Set forth below are the respective principal amounts, and certain other information regarding the terms of the Debentures that remained outstanding as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
Original Issue Dates
|
Principal Amount
|
|
Interest Rate
(1)
|
|
Maturity Dates
|
|
(In thousands)
|
|
|
|
|
September 2002
|
$
|
7,217
|
|
|
LIBOR plus 3.40%
|
|
September 2032
|
October 2004
|
10,310
|
|
|
LIBOR plus 2.00%
|
|
October 2034
|
Total
|
$
|
17,527
|
|
|
|
|
|
|
|
(1)
|
Interest rate resets quarterly.
|
These Debentures require quarterly interest payments, which are used to make quarterly distributions required to be paid on the corresponding trust preferred securities. Subject to certain conditions, we have the right, at our discretion, to defer those interest payments, and the corresponding distributions on the trust preferred securities, for up to
five
years. Exercise of this deferral right does not constitute a default of our obligations to pay the interest on the Debentures or the corresponding distributions that are payable on the trust preferred securities. As of
December 31, 2018
, we were current on all interest payments. We have committed to obtaining approval from the FRB and the CDBO prior to making any distributions representing interest, principal or other sums on subordinated debentures or trust preferred securities. There can be no assurance that our regulators will approve such payments in the future.
9. Related Party Transactions
Per ASC 850-10-20, a related party is defined under GAAP to include: affiliates, principal owners and their immediate family members, management and their immediate families, other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, and other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. GAAP requires disclosure of all material related party transactions, excluding compensation arrangements, expense allowances, and items eliminated in consolidation. Occasionally, we participate in loans with our affiliates through the ordinary course of business. These loan participations are not considered material transactions. Excluding these loan participations, the equity transactions described in Note 14, Shareholders' Equity, and the transactions noted below, we have no other related party transactions.
Deposits maintained by members of the Board of Directors and executive officers at the Bank totaled
$218 thousand
and
$272 thousand
at
December 31, 2018
and
2017
, respectively.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes
The components of income tax (benefit) expense from continuing operations consisted of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
Current taxes:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
(125
|
)
|
|
$
|
—
|
|
State
|
97
|
|
|
34
|
|
|
(5
|
)
|
Total current taxes
|
97
|
|
|
(91
|
)
|
|
(5
|
)
|
Deferred taxes:
|
|
|
|
|
|
Federal
|
(6,065
|
)
|
|
—
|
|
|
10,044
|
|
State
|
(4,784
|
)
|
|
—
|
|
|
6,793
|
|
Total deferred taxes
|
(10,849
|
)
|
|
—
|
|
|
16,837
|
|
Total income tax (benefit) expense
|
$
|
(10,752
|
)
|
|
$
|
(91
|
)
|
|
$
|
16,832
|
|
The reasons for the differences between the statutory federal income tax rates and our effective tax rates are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2018
|
|
2017
|
|
2016
|
Federal income tax based on statutory rate
|
21.0
|
%
|
|
34.0
|
%
|
|
34.0
|
%
|
State franchise tax net of federal income tax benefit
|
8.6
|
|
|
7.2
|
|
|
7.2
|
|
Permanent differences
|
(0.3
|
)
|
|
(0.4
|
)
|
|
—
|
|
Other
|
2.0
|
|
|
1.4
|
|
|
(0.1
|
)
|
Valuation allowance
|
(96.1
|
)
|
|
(43.1
|
)
|
|
(135.6
|
)
|
Total effective tax rate
|
(64.8
|
)%
|
|
(0.9
|
)%
|
|
(94.5
|
)%
|
At
December 31, 2018
, we have a net deferred tax asset of
$10.9 million
. At
December 31, 2017
, we had a net deferred tax asset of
$0
as a result of the full valuation allowance recorded against our gross deferred tax asset. Adjustments to our deferred tax valuation allowance could be required in the future if we were to conclude, on the basis of our assessment of the realizability of the deferred tax asset, that the amount of that asset which is more-likely-than-not, to be available to offset or reduce future taxes has decreased. Any such decrease would result in income tax expense. The components of our net deferred tax asset are as follows at:
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31,
|
2018
|
|
2017
|
Deferred tax asset:
|
|
|
|
Allowance for loan and lease losses
|
$
|
3,996
|
|
|
$
|
4,207
|
|
Other than temporary impairment on securities
|
—
|
|
|
56
|
|
State taxes
|
20
|
|
|
—
|
|
Deferred compensation
|
641
|
|
|
693
|
|
Litigation reserve
|
81
|
|
|
131
|
|
Other accrued expenses
|
504
|
|
|
927
|
|
Charitable contributions
|
127
|
|
|
241
|
|
Reserve for unfunded commitments
|
103
|
|
|
103
|
|
Tax credits
|
368
|
|
|
60
|
|
Net operating loss carry forward
|
5,642
|
|
|
9,754
|
|
Stock based compensation
|
166
|
|
|
363
|
|
Unrealized losses on securities
|
296
|
|
|
338
|
|
Total deferred tax assets
|
11,944
|
|
|
16,873
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation and amortization
|
(163
|
)
|
|
(133
|
)
|
Other
|
(846
|
)
|
|
(803
|
)
|
Total deferred tax liabilities
|
(1,009
|
)
|
|
(936
|
)
|
Valuation allowance
|
—
|
|
|
(15,937
|
)
|
Total net deferred tax asset
|
$
|
10,935
|
|
|
$
|
—
|
|
During the year ended
December 31, 2016
, we had income tax expense of
$16.8 million
as a result of the establishment of a full valuation allowance during 2016 on the balance of our deferred tax asset, which includes current and historical losses that may be used to offset taxes on future profits. Accounting rules specify that management must evaluate the deferred tax asset on a recurring basis to determine whether enough positive evidence exists to determine whether it is more-likely-than-not that the deferred tax asset will be available to offset or reduce future taxes. Negative evidence included the significant losses incurred during the second and third quarters of 2016, an increase in our nonperforming assets from December 31, 2015, and our accumulated deficit. Positive evidence included our forecast of our taxable income, the time period in which we have to utilize our deferred tax asset and the current economic conditions. The tax code allows net operating losses to be carried forward for 20 years from the date of the loss, and while management believed that the Company would be able to realize the deferred tax asset within that period, we were unable to assert the timing as to when that realization would occur. As a result of this conclusion and due to the hierarchy of evidence that the accounting rules specify, a valuation allowance had been recorded as of December 31, 2016 to offset the deferred tax asset.
During the year ended
December 31, 2017
, we had an income tax benefit of
$91 thousand
. The income tax benefit for the year ended December 31, 2017 represents the reclassification of the alternative minimum tax credit carryforward from a deferred tax asset to an income tax receivable as required by the Tax Cuts and Jobs Act signed into law on December 22, 2017. This was partially offset by the payment to the State of California for the cost of doing business within the state. No additional income tax expense was recorded as a result of our full valuation allowance, discussed further below. The year ended December 31, 2017 results reflect the estimated impact of the enactment of the new tax law, which resulted in a minimal increase in net income due to the elimination of the corporate alternative minimum tax. Additionally, as part of the newly enacted tax law, the decrease in our deferred tax asset and corresponding valuation allowance as of December 31, 2017 is primarily attributable to the Federal corporate tax rate decreasing from 35% to 21%, which caused us to decrease our gross deferred tax asset and the related valuation allowance to
$15.9 million
from
$21.7 million
as of September 30, 2017. Accounting rules specify that management must evaluate the deferred tax asset on a recurring basis to determine whether enough positive evidence exists to determine whether it is more-likely-than-not that the deferred tax asset will be available to offset or reduce future taxes. The tax code allows net operating losses to be carried forward for 20 years from the date of the loss, and while management believes that the Company will be able to realize the deferred tax asset within the period that our net operating losses may be carried forward, we are unable to assert the timing as to when that realization will occur. Due to the hierarchy of evidence that the accounting rules specify, management determined that a full valuation allowance that was previously established on the balance of our deferred tax asset was still required at December 31, 2017.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended
December 31, 2018
, we had an income tax benefit of
$10.8 million
. The income tax benefit during the year ended December 31, 2018 is as a result of our net income during the year and the release of our full valuation allowance of
$11.1 million
on our net deferred tax asset during the second quarter of 2018, discussed further below. Accounting rules specify that management must evaluate the deferred tax asset on a recurring basis to determine whether enough positive evidence exists to determine whether it is more-likely-than-not that the deferred tax asset will be available to offset or reduce future taxes. The tax code allows net operating losses incurred prior to December 31, 2017 to be carried forward for 20 years from the date of the loss, and based on its evaluation, management believes that the Company will be able to realize the deferred tax asset within the period that our net operating losses may be carried forward. Due to the hierarchy of evidence that the accounting rules specify, management determined that there continued to be enough positive evidence to support no valuation allowance on our deferred tax asset at
December 31, 2018
. Significant positive evidence included our three-year cumulative income position, continued improvement in asset quality, and the expectation that we will continue to have positive earnings based on eight trailing quarters of positive income and our forecast. Negative evidence included our accumulated deficit. Due to the hierarchy of evidence that the accounting rules specify, management determined that there continued to be enough positive evidence to support no valuation allowance on our deferred tax asset at
December 31, 2018
.
As of
December 31, 2018
, we had net operating loss carryforwards of
$12.0 million
and
$36.4 million
for federal and state tax purposes, respectively, which are available to offset future taxable income. If not used, these carryforwards begin expiring in 2032 and would fully expire in 2036. Refer to the table below for the amount and expiration of our net operating loss carryforwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
State
|
|
Expiration
|
|
|
(amounts in thousands)
|
|
|
2009
(1)
|
|
—
|
|
|
6,894
|
|
|
12/31/2032
|
2010
(1)
|
|
—
|
|
|
5,258
|
|
|
12/31/2032
|
2012
|
|
—
|
|
|
774
|
|
|
12/31/2032
|
2013
|
|
—
|
|
|
8,727
|
|
|
12/31/2033
|
2015
|
|
—
|
|
|
280
|
|
|
12/31/2035
|
2016
|
|
12,027
|
|
|
14,453
|
|
|
12/31/2036
|
2017
|
|
—
|
|
|
—
|
|
|
12/31/2037
|
2018
(2)
|
|
—
|
|
|
—
|
|
|
12/31/2038
|
|
|
$
|
12,027
|
|
|
$
|
36,386
|
|
|
|
|
|
(1)
|
California net operating loss carryforwards were suspended by the Franchise Tax Board during these periods and the carryover was extended.
|
|
|
(2)
|
As a result of the Tax Cuts and Jobs Act, federal net operating loss carryforwards do not expire starting with any losses sustained during 2018 or later. California net operating loss carryforwards begin to expire on the date listed.
|
We file income tax returns with the U.S. federal government and the State of California. As of December 31, 2018, we were subject to examination by the Internal Revenue Service with respect to our U.S. federal tax returns for the 2015 to 2017 tax years and the Franchise Tax Board for California state income tax returns for the 2014 to 2017 tax years. Net operating losses on our U.S. federal and California state income tax returns may be carried forward up to 20 years. As of December 31, 2018, we do not have any unrecognized tax benefits.
Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of tax expense. We did not have any accrued interest or penalties associated with any unrecognized tax benefits, and no interest expense was recognized during the years ended December 31, 2018, 2017 and 2016.
11. Stock-Based Employee Compensation Plans
In May 2010, our shareholders approved the adoption of our 2010 Equity Incentive Plan (the “2010 Incentive Plan”), which authorized and set aside a total of
400,000
shares of our common stock for issuance on the exercise of stock options or the grant of restricted stock or other equity incentives to our officers, and other key employees and directors. An additional
158,211
shares of common stock were also set aside which was equal to the total of the shares that were available for the grant of equity incentives under our shareholder-approved 2008 and 2004 Equity Incentive Plans (the "Previously Approved Plans") at the time of the adoption of the 2010 Incentive Plan. Options to purchase a total of
66,442
shares of our common stock granted under the Previously Approved Plans were outstanding at
December 31, 2018
. The 2010 Incentive Plan provides that if any of these outstanding options under the Previously Approved Plans expire or are terminated for any reason, then the number of shares that would become available for grants or awards of equity incentives under the 2010 Incentive Plan would be increased by an equivalent
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
number of shares. At the Annual Shareholders meeting held in May 2013, our shareholders approved an additional
800,000
share increase in the maximum number of shares of our common stock that may be issued pursuant to grants or exercises of options or restricted shares or other equity incentives under the 2010 Incentive Plan, of which
64,204
shares of restricted stock vested during the year ended
December 31, 2018
, thereby decreasing the maximum number of shares authorized under the 2010 Incentive Plan. As a result, as of
December 31, 2018
, the maximum number of shares that were authorized for the grant of options or other equity incentives under the 2010 Incentive Plan totaled
1,116,256
(assuming that all
66,442
shares of our common stock subject to options under the Previously Approved Plans expire or are terminated), or approximately
5%
of the shares of our common stock then outstanding.
A stock option entitles the recipient to purchase shares of our common stock at a price per share that may not be less than
100%
of the fair market value of the Company’s shares on the date the option is granted. Restricted shares may be granted at such purchase prices and on such other terms, including restrictions and Company repurchase or reacquisition rights, as are fixed by the Compensation Committee at the time rights to purchase such restricted shares are granted. Stock Appreciation Rights ("SARs") entitle the recipient to receive a cash payment in an amount equal to the difference between the fair market value of the Company’s shares on the date of vesting and a “base price” (which, in most cases, will be equal to the fair market value of the Company’s shares on the date the SAR is granted), subject to the right of the Company to make such payment in shares of its common stock at their then fair market value. Options, restricted shares and SARs may vest immediately or in installments over various periods generally ranging up to
five years
, subject to the recipient’s continued employment or service or the achievement of specified performance goals, as determined by the Compensation Committee at the time it grants or awards the options, the restricted shares or the SARs. Stock options and SARs may be granted for terms of up to
10
years after the date of grant, but will terminate sooner upon or shortly after a termination of service occurring prior to the expiration of the term of the option or SAR. The Company will become entitled to repurchase any unvested restricted shares, at the same price that was paid for the shares by the recipient, or to cancel those shares in the event of a termination of employment or service of the holder of such shares or if any performance goals specified in the award are not satisfied. To date, the Company has not granted any SARs.
Under FASB ASC 718-10, we are required to recognize, in our financial statements, the fair value of the options or any restricted shares that we grant as compensation cost over their respective service periods. The fair values of the options that were outstanding at
December 31, 2018
under the 2010 Incentive Plan were estimated as of their respective dates of grant using the Black-Scholes option-pricing model. The Company, under the 2010 Incentive Plan, granted restricted stock for the benefit of its employees. These restricted shares vest over a period of
three years
. The recipients of restricted shares have the right to vote all shares subject to such grant and receive all dividends with respect to such shares whether or not the shares have vested. The recipients do not pay any cash consideration for the shares.
Stock Options
The table below summarizes the weighted average assumptions used to determine the fair values of the options granted during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Assumptions with respect to:
|
2018
|
|
2017
|
|
2016
|
Expected volatility
|
30
|
%
|
|
33
|
%
|
|
38
|
%
|
Risk-free interest rate
|
2.69
|
%
|
|
1.98
|
%
|
|
1.70
|
%
|
Expected dividends
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected term (years)
|
5.8
|
|
|
5.7
|
|
|
6.3
|
|
Weighted average fair value of options granted during period
|
$
|
2.81
|
|
|
$
|
2.84
|
|
|
$
|
2.78
|
|
The following table summarizes the stock option activity under the Company’s equity incentive plans during the years ended
December 31, 2018
,
2017
and
2016
, respectively.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
2018
|
|
2017
|
|
2016
|
Outstanding – January 1,
|
792,577
|
|
|
$
|
6.41
|
|
|
1,066,914
|
|
|
$
|
6.35
|
|
|
838,696
|
|
|
$
|
6.20
|
|
Granted
|
154,011
|
|
|
8.20
|
|
|
3,700
|
|
|
8.21
|
|
|
402,051
|
|
|
6.89
|
|
Exercised
|
(75,108
|
)
|
|
4.95
|
|
|
(205,970
|
)
|
|
5.89
|
|
|
(97,292
|
)
|
|
4.66
|
|
Forfeited/Canceled
|
(7,150
|
)
|
|
6.47
|
|
|
(72,067
|
)
|
|
7.06
|
|
|
(76,541
|
)
|
|
9.74
|
|
Outstanding – December 31,
|
864,330
|
|
|
6.86
|
|
|
792,577
|
|
|
6.41
|
|
|
1,066,914
|
|
|
6.35
|
|
Options Exercisable – December 31,
|
588,873
|
|
|
6.49
|
|
|
537,229
|
|
|
6.17
|
|
|
604,970
|
|
|
5.95
|
|
Options Vested – December 31,
|
588,873
|
|
|
$
|
6.49
|
|
|
537,229
|
|
|
$
|
6.17
|
|
|
604,970
|
|
|
$
|
5.95
|
|
Options to purchase
75,108
,
205,970
, and
97,292
shares of our common stock were exercised during the years ended
December 31, 2018
,
2017
and
2016
, respectively. The aggregate intrinsic value of options exercised during the
year
s ended
December 31, 2018
,
2017
and
2016
, was
$356 thousand
,
$405 thousand
and
$249 thousand
, respectively. The fair values of options vested during the years ended
December 31, 2018
,
2017
and
2016
were
$360 thousand
,
$401 thousand
and
$311 thousand
, respectively.
The following table provides additional information regarding the vested and unvested options that were outstanding at
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding as of December 31, 2018
|
|
Options Exercisable
as of December 31, 2018
(1)
|
|
Vested
|
|
Unvested
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
$2.97 – $3.99
|
18,003
|
|
|
—
|
|
|
$
|
3.48
|
|
|
2.45
|
|
18,003
|
|
|
$
|
3.48
|
|
$4.00 – $4.99
|
16,000
|
|
|
—
|
|
|
4.34
|
|
|
2.30
|
|
16,000
|
|
|
4.34
|
|
$5.00– $5.99
|
15,000
|
|
|
—
|
|
|
5.30
|
|
|
4.47
|
|
15,000
|
|
|
5.30
|
|
$6.00– $6.99
|
415,084
|
|
|
81,403
|
|
|
6.61
|
|
|
5.50
|
|
415,084
|
|
|
6.57
|
|
$7.00-$8.90
|
124,786
|
|
|
194,054
|
|
|
7.63
|
|
|
7.93
|
|
124,786
|
|
|
7.09
|
|
|
588,873
|
|
|
275,457
|
|
|
$
|
6.86
|
|
|
6.26
|
|
588,873
|
|
|
$
|
6.49
|
|
|
|
(1)
|
The weighted average remaining contractual life of the options that were exercisable as of
December 31, 2018
was
5.32
years.
|
The aggregate intrinsic values of options that were outstanding and exercisable under the 2010 Incentive Plan at
December 31, 2018
and
2017
was
$388 thousand
and
$1.4 million
, respectively.
A summary of the status of the unvested options outstanding as of
December 31, 2018
,
2017
and
2016
, and changes in the weighted average grant date fair values of the unvested options during the years ended
December 31, 2018
,
2017
and
2016
, are set forth in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
2018
|
|
2017
|
|
2016
|
|
Number of
Shares Subject
to Options
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Shares Subject
to Options
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Shares Subject
to Options
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested at the beginning of the year
|
255,348
|
|
|
$
|
2.80
|
|
|
461,944
|
|
|
$
|
2.79
|
|
|
215,926
|
|
|
$
|
2.93
|
|
Granted
|
154,011
|
|
|
2.81
|
|
|
3,700
|
|
|
2.84
|
|
|
402,051
|
|
|
2.75
|
|
Vested
|
(126,752
|
)
|
|
2.84
|
|
|
(141,829
|
)
|
|
2.83
|
|
|
(108,820
|
)
|
|
2.86
|
|
Forfeited/Canceled
|
(7,150
|
)
|
|
2.66
|
|
|
(68,467
|
)
|
|
2.68
|
|
|
(47,213
|
)
|
|
2.88
|
|
Unvested at the end of the year
|
275,457
|
|
|
$
|
2.79
|
|
|
255,348
|
|
|
$
|
2.80
|
|
|
461,944
|
|
|
$
|
2.79
|
|
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 2018
, the weighted average period over which nonvested awards were expected to be recognized was
2.35
years.
Restricted Stock
We issued
82,217
shares of restricted stock under the 2010 Incentive Plan during the year ended
December 31, 2018
, at a price of
$8.33
that vest on an annual prorated basis over the next
three
years. The following table summarizes the activity related to restricted stock granted, vested and forfeited under our equity incentive plans during the years ended
December 31, 2018
,
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Number of Shares
|
|
Average Grant Date Fair Value
|
|
Number of Shares
|
|
Average Grant Date Fair Value
|
|
Number of Shares
|
|
Average Grant Date Fair Value
|
Outstanding at the beginning of the year
|
103,508
|
|
|
$
|
7.33
|
|
|
151,298
|
|
|
$
|
6.84
|
|
|
129,283
|
|
|
$
|
6.75
|
|
Granted
|
82,217
|
|
|
8.33
|
|
|
40,907
|
|
|
8.02
|
|
|
121,775
|
|
|
6.79
|
|
Vested
|
(64,204
|
)
|
|
7.29
|
|
|
(69,667
|
)
|
|
6.80
|
|
|
(67,456
|
)
|
|
6.68
|
|
Forfeited
|
(6,490
|
)
|
|
7.92
|
|
|
(19,030
|
)
|
|
6.82
|
|
|
(32,304
|
)
|
|
6.64
|
|
Outstanding at the end of the year
|
115,031
|
|
|
$
|
8.04
|
|
|
103,508
|
|
|
$
|
7.33
|
|
|
151,298
|
|
|
$
|
6.84
|
|
Compensation Expense
We expect that the compensation expense that will be recognized during the periods presented below in respect of stock options and restricted stock outstanding at
December 31, 2018
, will be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Stock Based Compensation Expense Stock Options
|
|
Estimated Stock Based Compensation Expense Restricted Stock
|
|
Estimated Stock Based Compensation Expense Total
|
(Dollars in thousands)
|
|
|
|
|
|
For the years ending December 31,
|
|
|
|
|
|
2019
|
$
|
192
|
|
|
$
|
235
|
|
|
$
|
427
|
|
2020
|
153
|
|
|
185
|
|
|
338
|
|
2021
|
45
|
|
|
78
|
|
|
123
|
|
2022
|
19
|
|
|
46
|
|
|
65
|
|
2023 and beyond
|
3
|
|
|
11
|
|
|
14
|
|
|
$
|
412
|
|
|
$
|
555
|
|
|
$
|
967
|
|
The aggregate amounts of stock based compensation expense recognized in our consolidated statements of operations for the years ended
December 31, 2018
,
2017
and
2016
were
$623 thousand
,
$796 thousand
and
$1.0 million
, respectively, in each case net of taxes.
12. Employee Benefit Plans
The Company has a 401(k) plan that covers substantially all full-time employees. That plan permits voluntary contributions by employees, a portion of which are sometimes matched by the Company. The Company’s expenses relating to its contributions to the 401(k) plan for the years ended
December 31, 2018
,
2017
and
2016
were
$365 thousand
,
$248 thousand
, and
$342 thousand
, respectively.
In January 2001, the Company established an unfunded Supplemental Retirement Plan (“SERP”) for our former CEO, Raymond E. Dellerba, who retired from that position in April 2013. The SERP was amended and restated in April 2006 to comply with the requirements of new Section 409A of Internal Revenue Code. The SERP provides that, subject to meeting certain vesting requirements described below, upon reaching age
65
, Mr. Dellerba will become entitled to receive
180
equal successive monthly retirement payments, each in an amount equal to
60%
of his average monthly base salary during the
three years
immediately preceding his reaching 65 years old (the “Monthly SERP Benefit”). Mr. Dellerba reached the age of 65 in January 2013 and, as a result, a monthly benefit payment under the SERP to Mr. Dellerba commenced on February 1, 2013.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company follows FASB ASC 715-30-35, which requires us to recognize in our balance sheet the funded status of any post-retirement plans that we maintain and to recognize, in other comprehensive income, changes in funded status of any such plans in any year in which changes occur.
The changes in the projected benefit obligations under the SERP during
2018
,
2017
and
2016
, its funded status at
December 31, 2018
,
2017
and
2016
, and the amounts recognized in our consolidated statements of financial condition at each of those dates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
(Dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
Change in benefit obligation:
|
|
|
|
|
|
Benefit obligation at beginning of period
|
$
|
2,345
|
|
|
$
|
2,511
|
|
|
$
|
2,667
|
|
Service cost
|
—
|
|
|
—
|
|
|
—
|
|
Interest cost
|
131
|
|
|
141
|
|
|
150
|
|
Actuarial loss/(gain)
|
—
|
|
|
—
|
|
|
—
|
|
(Benefits paid)
|
(307
|
)
|
|
(307
|
)
|
|
(306
|
)
|
Benefit obligation at end of period
|
$
|
2,169
|
|
|
$
|
2,345
|
|
|
$
|
2,511
|
|
Funded status:
|
|
|
|
|
|
Amounts recognized in the Statement of Financial Condition
|
|
|
|
|
|
Unfunded accrued SERP liability—current
|
$
|
(299
|
)
|
|
$
|
(299
|
)
|
|
$
|
(299
|
)
|
Unfunded accrued SERP liability—noncurrent
|
(1,870
|
)
|
|
(2,046
|
)
|
|
(2,212
|
)
|
Total unfunded accrued SERP liability
|
$
|
(2,169
|
)
|
|
$
|
(2,345
|
)
|
|
$
|
(2,511
|
)
|
Net amount recognized in accumulated other comprehensive income
|
|
|
|
|
|
Prior service cost/(benefit)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net actuarial loss/(gain)
|
—
|
|
|
—
|
|
|
—
|
|
Total net amount recognized in accumulated other comprehensive income
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accumulated benefit obligation
|
$
|
2,169
|
|
|
$
|
2,345
|
|
|
$
|
2,511
|
|
Components of net periodic SERP cost year to date:
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
131
|
|
|
141
|
|
|
150
|
|
Amortization of prior service cost/(benefit)
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net actuarial loss/(gain)
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic SERP cost
|
$
|
131
|
|
|
$
|
141
|
|
|
$
|
150
|
|
As of
December 31, 2018
,
$1.5 million
benefits are expected to be paid in the next five years and a total of
$1.3 million
of benefits are expected to be paid from year 2024 through year 2028. In
2019
,
$120,245
is expected to be recognized in net periodic benefit cost.
13. Earnings Per Share (“EPS”)
Basic EPS excludes dilution and is computed by dividing net income or loss allocable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock that would then share in our earnings.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows how we computed basic and diluted EPS for the
year ended
December 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
For the Year Ended December 31,
|
2018
|
|
2017
|
|
2016
|
Basic EPS:
|
|
|
|
|
|
Net income
|
$
|
27,339
|
|
|
$
|
10,449
|
|
|
$
|
(34,643
|
)
|
Less dividends on preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
Less dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
Less dividends on unvested shares
|
—
|
|
|
—
|
|
|
—
|
|
Net income allocable to common shareholders
|
$
|
27,339
|
|
|
$
|
10,449
|
|
|
$
|
(34,643
|
)
|
Less earnings allocated to participating securities
|
648
|
|
|
49
|
|
|
(236
|
)
|
Earnings allocated to common shareholders
|
$
|
26,691
|
|
|
$
|
10,400
|
|
|
$
|
(34,407
|
)
|
Weighted average common shares outstanding
|
22,788
|
|
|
23,072
|
|
|
22,802
|
|
Basic earnings per common share
|
$
|
1.17
|
|
|
$
|
0.45
|
|
|
$
|
(1.51
|
)
|
Diluted EPS:
|
|
|
|
|
|
Earnings allocated to common shareholders
|
$
|
27,339
|
|
|
$
|
10,449
|
|
|
$
|
(34,643
|
)
|
Weighted average common shares outstanding
|
22,788
|
|
|
23,072
|
|
|
22,802
|
|
Add dilutive effects of restricted stock grants
|
115
|
|
|
109
|
|
|
157
|
|
Add dilutive effects for assumed conversion of Series A preferred stock
|
438
|
|
|
—
|
|
|
—
|
|
Add dilutive effect for stock options
|
186
|
|
|
131
|
|
|
—
|
|
Weighted average diluted common shares outstanding
|
23,527
|
|
|
23,312
|
|
|
22,959
|
|
Diluted earnings per common share
|
$
|
1.16
|
|
|
$
|
0.45
|
|
|
$
|
(1.51
|
)
|
|
|
(1)
|
The basic and diluted earnings per share amounts for the years ended December 31, 2018, 2017 and 2016 are the same under both the Treasury Stock Method and the Two-Class Method as prescribed in FASB ASC 260-10,
Earnings Per Share
.
|
The weighted average shares that have an antidilutive effect in the calculation of diluted net income (loss) per share and have been excluded from the computations above were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Stock options
(1)(2)
|
138,608
|
|
|
200,824
|
|
|
1,038,317
|
|
|
|
(1)
|
Stock options were excluded from the computation of diluted earnings per common share for the year ended December 31, 2016 as we reported a net loss from continuing operations.
|
|
|
(2)
|
Stock options were excluded from the computation of diluted earnings per common share for the years ended December 31, 2018 and 2017 because the options were either “out-of-the-money” or the effect of exercise would have been antidilutive.
|
14. Shareholders’ Equity
Preferred Stock
During the year ended
December 31, 2018
, Carpenter Community BancFund, LP and Carpenter Community BancFund-A, LP ("the Carpenter Funds"), the largest shareholders of PMBC, the holding company of the Bank, sold all of their equity interest in PMBC to certain accredited investors in privately negotiated transactions (the "Carpenter Disposition Transactions"). The Carpenter Disposition Transactions included the sale of
1,467,155
shares of a new series of non-voting preferred stock designated as Series A Non-Voting Preferred Stock (the Series A Non-Voting Preferred Stock) that PMBC issued to the Carpenter Funds in exchange (the Exchange) for
1,467,155
shares of PMBC’s common stock owned by the Carpenter Funds. After giving effect to the Exchange, PMBC had
21,917,995
shares of common stock issued and outstanding and
1,467,155
shares of Series A Non-Voting Preferred Stock issued and outstanding. The shares of Series A Non-Voting Preferred Stock were issued to the Carpenter Funds to facilitate the Carpenter Disposition Transactions and have substantially the same rights, preferences and privileges of the common stock, except that the Series A Non-Voting Preferred Stock is not entitled to vote on any matter other than where required under California law and that each share of Series A Non-Voting Preferred Stock has a liquidation preference of
$0.0001
per share over the common stock. The shares of common stock and Series A Non-Voting Preferred Stock purchased by investors from the Carpenter Funds in the Carpenter Disposition Transactions are restricted securities subject to trading restrictions under the federal securities laws.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The lead investor in the Carpenter Disposition Transactions, Patriot Financial Partners III, L.P., a Delaware limited partnership ("Patriot"), acquired
3,636,363
total common-equivalent shares of PMBC, comprised of
2,169,208
shares of common stock (
9.9%
of the total voting shares outstanding after giving effect to the Exchange) and
1,467,155
shares of the Series A Non-Voting Preferred Stock. After giving effect to the Carpenter Disposition Transactions (including the Exchange), Patriot holds a
15.6%
equity interest in the PMBC.
Accumulated Other Comprehensive Income, net
Accumulated other comprehensive income, net as of
December 31, 2018
,
2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) on Securities Available-for-Sale, net of tax
|
|
Accumulated Other Comprehensive Income, Net
|
|
(Dollars in thousands)
|
Beginning balance as of January 1, 2016
|
$
|
(810
|
)
|
|
$
|
(810
|
)
|
Other comprehensive income before reclassifications, net of tax provision of $739 thousand
(1)
|
(1,032
|
)
|
|
(1,032
|
)
|
Amounts reclassified from accumulated other comprehensive income, net of tax
|
—
|
|
|
—
|
|
Other comprehensive income, net of tax provision of $739 thousand
|
(1,032
|
)
|
|
(1,032
|
)
|
Ending balance as of December 31, 2016
|
$
|
(1,842
|
)
|
|
$
|
(1,842
|
)
|
Other comprehensive income before reclassifications
(2)
|
695
|
|
|
695
|
|
Amounts reclassified from accumulated other comprehensive income, net of tax
(3)
|
4
|
|
|
4
|
|
Other comprehensive income
(2)
|
699
|
|
|
699
|
|
Ending balance as of December 31, 2017
|
$
|
(1,143
|
)
|
|
$
|
(1,143
|
)
|
Other comprehensive income before reclassifications, net of tax of $142 thousand
|
(50
|
)
|
|
(50
|
)
|
Amounts reclassified from accumulated other comprehensive loss
(4)
|
49
|
|
|
49
|
|
Other comprehensive loss, net of tax of $142 thousand
|
(1
|
)
|
|
(1
|
)
|
Ending balance as of December 31, 2018
|
$
|
(1,144
|
)
|
|
$
|
(1,144
|
)
|
|
|
(1)
|
Tax impact included in
Deferred tax assets
.
|
|
|
(2)
|
No
tax impact as a result of the full valuation allowance recorded against our deferred tax asset at December 31, 2017.
|
|
|
(3)
|
Relates to the realized loss on our securities available for sale. The realized loss is included within
Net loss on sale of securities available for sale
.
|
|
|
(4)
|
This balance consists of the
$48 thousand
net gain on sale of available for sale debt securities included in our
consolidated statement of operations
offset by
$97 thousand
included in our
consolidated statement of shareholders' equity
as an adjustment to our beginning retained earnings.
|
Dividends
Payment of Cash Dividends by the Company
. California laws place restrictions on the ability of California corporations to pay cash dividends on preferred or common stock. Subject to certain limited exceptions, a California corporation may pay cash dividends only to the extent of (i) the amount of its retained earnings or (ii) the amount by which the fair value of the corporation’s assets exceeds its liabilities. We have committed to obtaining approval from the FRB and the CDBO prior to paying any dividends. The Company's ability to pay dividends is also limited by the ability of the Bank to pay cash dividends to the Company. See “
—Payment of Dividends by the Bank to the Compan
y” below.
Payment of Dividends by the Bank to the Company
. Generally, the principal source of cash available to a bank holding company consists of cash dividends from its bank subsidiaries. Under California law, the Board of Directors of the Bank may declare and pay cash dividends to the Company, which is its sole shareholder, subject to the restriction that the amount available for the payment of cash dividends may not exceed the lesser of (i) the Bank’s retained earnings or (ii) its net income for its last three fiscal years (less the amount of any dividends paid during such period). Cash dividends by the Bank to the Company in excess of that amount may be made only with the prior approval of the California Commissioner of Financial Institutions (“Commissioner”). If the Commissioner finds that the shareholders’ equity of the Bank is not adequate, or that the payment by the Bank of cash dividends to the Company would be unsafe or unsound for the Bank, the Commissioner can order the Bank not to pay such dividends.
The ability of the Bank to pay dividends is further restricted under the Federal Deposit Insurance Corporation Improvement Act of 1991, which prohibits an FDIC-insured bank from paying dividends if, after making such payment, the bank would fail to meet any of its minimum capital requirements. Under the Financial Institutions Supervisory Act and Federal Financial Institutions
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reform, Recovery and Enforcement Act of 1989, federal banking regulators also have authority to prohibit FDIC-insured financial institutions from engaging in business practices which are considered to be unsafe or unsound. Under the authority of these acts, federal bank regulatory agencies, as part of their supervisory powers, generally require FDIC insured banks to adopt dividend policies which limit the payment of cash dividends. We have agreed that the Bank will not, without the FRB and CDBO's prior written approval, pay any dividends to Bancorp.
15. Commitments and Contingencies
Leases
We lease certain facilities and equipment under various non-cancelable operating leases, which generally include
2%
to
6%
escalation clauses in the lease agreements. Rent expense for the years ended
December 31, 2018
,
2017
and
2016
was
$2.1 million
,
$2.4 million
, and
$2.6 million
, respectively.
Future minimum non-cancelable lease commitments were as follows at
December 31, 2018
:
|
|
|
|
|
(Dollars in thousands)
|
|
2019
|
$
|
2,398
|
|
2020
|
1,242
|
|
2021
|
347
|
|
2022
|
218
|
|
2023 and beyond
|
452
|
|
Total
|
$
|
4,657
|
|
Commitments
To meet the financing needs of our customers in the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. At
December 31, 2018
and
2017
, we were committed to fund certain loans including letters of credit amounting to approximately
$302 million
and
$295 million
, respectively. The contractual amounts of a credit-related financial instrument, such as a commitment to extend credit, a credit-card arrangement or a letter of credit, represents the amount of potential accounting loss should the commitment be fully drawn upon, the customer were to default, and the value of any existing collateral securing the customer’s payment obligation becomes worthless. The loss reserve for unfunded loan commitments was
$350 thousand
and
$350 thousand
at
December 31, 2018
and
2017
, respectively.
As a result, we use the same credit policies in making commitments to extend credit and conditional obligations as we do for on-balance sheet instruments. Commitments generally have fixed expiration dates; however, since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis, using the same credit underwriting standards that are employed in making commercial loans. The amount of collateral obtained, if any, upon an extension of credit is based on our evaluation of the creditworthiness of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential real estate and income-producing commercial properties.
We are required to purchase stock in the FRBSF in an amount equal to
6%
of our capital, one-half of which must be paid currently with the balance due upon request.
The Bank is a member of the FHLB and therefore, is required to purchase FHLB stock in an amount equal to the lesser of
1%
of the Bank’s real estate loans that are secured by residential properties, or
5%
of total advances.
Litigation, Claims and Assessments
We are a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted against us.
In accordance with applicable accounting guidance, we establish an accrued liability for lawsuits or other legal proceedings when they present loss contingencies that are both probable and estimable. We estimate any potential loss based upon currently available information and significant judgments and a variety of assumptions, and known and unknown uncertainties. Moreover, the facts and circumstances on which such estimates are based will change over time. Therefore, the amount of any losses we might incur in any lawsuits or other legal proceedings may exceed amounts which we had accrued based on our estimates and
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
those estimates do not represent the maximum loss exposure that we may have in connection with any lawsuits or other legal proceedings.
In December 2016, following an ongoing review related to alleged discriminatory practices within our discontinued mortgage banking business, we received notice that the U.S. Department of Justice (“DOJ”) had authorized a potential enforcement action against the Bank. During the year ended
December 31, 2018
, we settled this matter with the DOJ for
$1.0 million
, which we have fully accrued and funded as of
December 31, 2018
.
Based on our evaluation of the remaining lawsuits and other proceedings that were pending against us as of
December 31, 2018
, the outcomes in those suits or other proceedings are not expected to have, either individually or in the aggregate, a material adverse effect on our consolidated financial position, results of operations or cash flows. However, in light of the inherent uncertainties involved, some of which are beyond our control, and the very large or indeterminate damages often sought in such legal actions or proceedings, an adverse outcome in one or more of these suits or proceedings could be material to our results of operations or cash flows for any particular reporting period.
16. Capital/Operating Plans
Under federal banking regulations that apply to all United States-based bank holding companies over $3 billion in total assets and all federally insured banks, the Bank (on a stand-alone basis) must meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. The Company (on a consolidated basis) is below the reporting threshold of $3 billion in total assets and therefore is not subject to the same capital adequacy requirements. Under those regulations, each federally insured bank is determined by its primary federal bank regulatory agency to come within one of the following capital adequacy categories on the basis of its capital ratios:
|
|
•
|
significantly undercapitalized; or
|
|
|
•
|
critically undercapitalized
|
Certain qualitative assessments also are made by a banking institution’s primary federal regulatory agency that could lead the agency to determine that the banking institution should be assigned to a lower capital category than the one indicated by the quantitative measures used to assess the institution’s capital adequacy. At each successive lower capital category, a banking institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.
The actual capital amounts and ratios of the Bank at
December 31, 2018
and
December 31, 2017
are presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable Federal Regulatory Requirement
|
At December 31, 2018
|
Actual Capital
|
|
For Capital Adequacy Purposes
|
|
To be Categorized As Well Capitalized
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
(Dollars in thousands)
|
Total Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
Bank
|
160,372
|
|
|
13.0
|
%
|
|
106,072
|
|
|
At least 8.625
|
|
$
|
122,982
|
|
|
At least 10.0
|
Common Equity Tier 1 Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
146,516
|
|
|
11.9
|
%
|
|
63,028
|
|
|
At least 5.125
|
|
79,938
|
|
|
At least 6.5
|
Tier 1 Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
Bank
|
146,516
|
|
|
11.9
|
%
|
|
81,475
|
|
|
At least 6.625
|
|
$
|
98,385
|
|
|
At least 8.0
|
Tier 1 Capital to Average Assets:
|
|
|
|
|
|
|
|
|
|
Bank
|
146,516
|
|
|
10.8
|
%
|
|
54,403
|
|
|
At least 4.0
|
|
$
|
68,004
|
|
|
At least 5.0
|
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable Federal Regulatory Requirement
|
At December 31, 2017
|
Actual Capital
|
|
For Capital Adequacy
Purposes
|
|
To be Categorized
As Well Capitalized
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
(Dollars in thousands)
|
Total Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
137,581
|
|
|
11.6
|
%
|
|
102,386
|
|
|
At least 8.625
|
|
$
|
118,709
|
|
|
At least 10.0
|
Common Equity Tier 1 Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
123,035
|
|
|
10.4
|
%
|
|
60,838
|
|
|
At least 5.125
|
|
77,161
|
|
|
At least 6.5
|
Tier 1 Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
123,035
|
|
|
10.4
|
%
|
|
78,645
|
|
|
At least 6.625
|
|
$
|
94,967
|
|
|
At least 8.0
|
Tier 1 Capital to Average Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
123,035
|
|
|
9.9
|
%
|
|
49,801
|
|
|
At least 4.0
|
|
$
|
62,251
|
|
|
At least 5.0
|
As the above tables indicate, at
December 31, 2018
and
2017
, the Bank (on a stand-alone basis) qualified as a “well—capitalized” institution under federally mandated capital standards and federally established prompt corrective action regulations. Since
December 31, 2018
, there have been no events or circumstances known to us which have changed or which are expected to result in a change in the Bank’s classification as a well-capitalized institution.
In early July 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new common equity Tier 1 capital ratio, increase the minimum Tier 1 capital ratio requirement, and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. The final rules took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rules. At
December 31, 2018
, the Bank (on a stand-alone basis) continued to qualify as a well-capitalized institution under the capital adequacy guidelines described above.
17. Parent Company Only Information
Condensed Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
2018
|
|
2017
|
Assets:
|
|
|
|
Due from banks and interest-bearing deposits with financial institutions
|
$
|
16,699
|
|
|
$
|
13,916
|
|
Investment in subsidiaries
|
151,516
|
|
|
124,550
|
|
Other assets
|
(286
|
)
|
|
55
|
|
Total assets
|
$
|
167,929
|
|
|
$
|
138,521
|
|
Liabilities and shareholders’ equity:
|
|
|
|
Liabilities
|
$
|
102
|
|
|
$
|
76
|
|
Junior subordinated debentures
|
17,527
|
|
|
17,527
|
|
Shareholders’ equity
|
150,300
|
|
|
120,918
|
|
Total liabilities and shareholders’ equity
|
$
|
167,929
|
|
|
$
|
138,521
|
|
Condensed Statements of Operations
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
Interest income
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
2
|
|
Interest expense
|
(845
|
)
|
|
(670
|
)
|
|
(582
|
)
|
Other income
|
25
|
|
|
24
|
|
|
17
|
|
Other expenses
|
(1,302
|
)
|
|
(1,045
|
)
|
|
(1,012
|
)
|
Equity in undistributed earnings (loss) of subsidiaries
|
29,889
|
|
|
12,195
|
|
|
(33,075
|
)
|
Income tax (expense) benefit
|
(432
|
)
|
|
(58
|
)
|
|
7
|
|
Net income (loss)
|
$
|
27,339
|
|
|
$
|
10,449
|
|
|
$
|
(34,643
|
)
|
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
Net income (loss)
|
$
|
27,339
|
|
|
$
|
10,449
|
|
|
$
|
(34,643
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
Net decrease (increase) in other assets
|
9
|
|
|
47
|
|
|
(19
|
)
|
Net decrease in deferred taxes
|
331
|
|
|
—
|
|
|
38
|
|
Stock-based compensation expense
|
885
|
|
|
796
|
|
|
1,039
|
|
Undistributed (income) loss of subsidiary
|
(29,889
|
)
|
|
(12,195
|
)
|
|
33,075
|
|
Net increase (decrease) in interest payable
|
26
|
|
|
11
|
|
|
(71
|
)
|
Net (decrease) increase in other liabilities
|
(1
|
)
|
|
(26
|
)
|
|
27
|
|
Net cash used in operating activities
|
(1,300
|
)
|
|
(918
|
)
|
|
(554
|
)
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
Net decrease in loans
|
—
|
|
|
—
|
|
|
—
|
|
Net cash provided by investing activities
|
—
|
|
|
—
|
|
|
—
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Payments for exchange of preferred stock for common stock
|
—
|
|
|
—
|
|
|
—
|
|
Common stock options exercised
|
372
|
|
|
1,213
|
|
|
455
|
|
Tax effect included in stockholders equity of restricted stock vesting
|
—
|
|
|
—
|
|
|
(16
|
)
|
Return of capital from subsidiaries
|
3,711
|
|
|
15,000
|
|
|
4,000
|
|
Capital contribution to subsidiaries
|
—
|
|
|
(10,000
|
)
|
|
(5,000
|
)
|
Net cash provided by (used in) financing activities
|
4,083
|
|
|
6,213
|
|
|
(561
|
)
|
Net increase (decrease) in cash and cash equivalents
|
2,783
|
|
|
5,295
|
|
|
(1,115
|
)
|
Cash and Cash Equivalents, beginning of period
|
13,916
|
|
|
8,621
|
|
|
9,736
|
|
Cash and Cash Equivalents, end of period
|
$
|
16,699
|
|
|
$
|
13,916
|
|
|
$
|
8,621
|
|
18. Business Segment Information
We have
one
reportable business segment, commercial banking.
The commercial banking segment provides small and medium-size businesses, professional firms and individuals with a diversified range of products and services such as various types of deposit accounts, various types of commercial and consumer loans, cash management services, and online banking services.
Since our operating segment derives all of its revenues from interest and noninterest income and interest expense constitutes its most significant expense, this segment is reported below using net interest income (interest income less interest expense) and noninterest income (primarily net gains on sales of small business administration loans and fee income). We do not allocate general and administrative expenses or income taxes to our operating segment.
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth information regarding the net interest income and noninterest income for our commercial banking and discontinued operations segments, respectively, for the years ended
December 31, 2018
,
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Commercial
|
|
Other
(1)
|
|
Total
|
Net interest income for the year ended December 31,
|
|
2018
|
$
|
48,150
|
|
|
$
|
772
|
|
|
$
|
48,922
|
|
2017
|
$
|
42,995
|
|
|
$
|
747
|
|
|
$
|
43,742
|
|
2016
|
$
|
36,044
|
|
|
$
|
(521
|
)
|
|
$
|
35,523
|
|
Noninterest income for the Year ended December 31,
|
|
|
|
|
|
2018
|
$
|
4,610
|
|
|
$
|
25
|
|
|
$
|
4,635
|
|
2017
|
$
|
3,948
|
|
|
$
|
426
|
|
|
$
|
4,374
|
|
2016
|
$
|
3,438
|
|
|
$
|
(501
|
)
|
|
$
|
2,937
|
|
Segment Assets at:
|
|
|
|
|
|
December 31, 2018
|
$
|
1,349,097
|
|
|
$
|
241
|
|
|
$
|
1,349,338
|
|
December 31, 2017
|
$
|
1,320,454
|
|
|
$
|
2,150
|
|
|
$
|
1,322,604
|
|
|
|
(1)
|
Represents net interest income and noninterest income for PMAR and PMBC.
|
19. Unaudited Quarterly Information
Unaudited quarterly information for each of the three months in the years ended
December 31, 2018
and
2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December 31, 2018
|
|
September 30, 2018
|
|
June 30, 2018
|
|
March 31, 2018
|
|
(in thousands, except per share data)
|
Total interest income
|
$
|
16,395
|
|
|
$
|
15,218
|
|
|
$
|
15,914
|
|
|
$
|
15,015
|
|
Total interest expense
|
3,794
|
|
|
3,529
|
|
|
3,467
|
|
|
2,830
|
|
Net interest income
|
12,601
|
|
|
11,689
|
|
|
12,447
|
|
|
12,185
|
|
Provision for loan and lease losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net interest income after provision for loan and lease losses
|
12,601
|
|
|
11,689
|
|
|
12,447
|
|
|
12,185
|
|
Total noninterest income
|
1,329
|
|
|
1,115
|
|
|
1,136
|
|
|
1,055
|
|
Total noninterest expense
|
9,135
|
|
|
9,002
|
|
|
9,299
|
|
|
9,533
|
|
Income before income taxes
|
4,795
|
|
|
3,802
|
|
|
4,284
|
|
|
3,707
|
|
Income tax (benefit) provision
|
431
|
|
|
(98
|
)
|
|
(11,085
|
)
|
|
—
|
|
Net income allocable to common shareholders
|
$
|
4,364
|
|
|
$
|
3,900
|
|
|
$
|
15,369
|
|
|
$
|
3,707
|
|
Per share data-basic:
|
|
|
|
|
|
|
|
Net income allocable to common shareholders
|
$
|
0.19
|
|
|
$
|
0.17
|
|
|
$
|
0.66
|
|
|
$
|
0.16
|
|
Per share data-diluted:
|
|
|
|
|
|
|
|
Net income allocable to common shareholders
|
$
|
0.19
|
|
|
$
|
0.17
|
|
|
$
|
0.65
|
|
|
$
|
0.16
|
|
PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December 31, 2017
|
|
September 30, 2017
|
|
June 30, 2017
|
|
March 31, 2017
|
|
(in thousands, except per share data)
|
Total interest income
|
$
|
13,812
|
|
|
$
|
14,025
|
|
|
$
|
12,132
|
|
|
$
|
11,604
|
|
Total interest expense
|
2,542
|
|
|
2,020
|
|
|
1,736
|
|
|
1,533
|
|
Net interest income
|
11,270
|
|
|
12,005
|
|
|
10,396
|
|
|
10,071
|
|
Provision for loan and lease losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net interest income after provision for loan and lease losses
|
11,270
|
|
|
12,005
|
|
|
10,396
|
|
|
10,071
|
|
Total noninterest income
|
1,009
|
|
|
964
|
|
|
1,431
|
|
|
970
|
|
Total noninterest expense
|
10,108
|
|
|
9,176
|
|
|
9,262
|
|
|
9,211
|
|
Income before income taxes
|
2,171
|
|
|
3,793
|
|
|
2,565
|
|
|
1,830
|
|
Income tax (benefit) provision
|
(241
|
)
|
|
37
|
|
|
64
|
|
|
49
|
|
Net income (loss) allocable to common shareholders
|
$
|
2,412
|
|
|
$
|
3,756
|
|
|
$
|
2,501
|
|
|
$
|
1,781
|
|
Per share data-basic:
|
|
|
|
|
|
|
|
Net income (loss) allocable to common shareholders
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
Per share data-diluted:
|
|
|
|
|
|
|
|
Net income (loss) allocable to common shareholders
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|