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Pacific Mercantile Bancorp Reports Second Quarter and Year

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Enterprising Investor Member Level  Friday, 07/25/14 08:37:00 AM
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Pacific Mercantile Bancorp Reports Second Quarter and Year to Date 2014 Operating Results (7/25/14)

Pacific Mercantile Bancorp (Nasdaq:PMBC) today reported its results of operations for the three months ended June 30, 2014. For the second quarter of 2014, the Company reported net income of $4 thousand, or $0.00 per share. This compares with net income of $451 thousand, or $0.02 per share, in the first quarter of 2014, and a net loss of $3.1 million, or $(0.17) per share, in the second quarter of 2013. The decline in earnings as compared to the first quarter of 2014 is primarily attributable to an increase in the provision for loan and lease losses, a decline in net interest income, and a smaller contribution from discontinued operations during the quarter, partially offset by a decrease in noninterest expense.

Commenting on the results, Steve Buster, President & CEO of Pacific Mercantile Bancorp, said, "We had a very strong quarter of business development with annualized loan growth of 15%. Our loan growth for the first half of the year was driven by more than 20% annualized growth in both commercial loans and owner-occupied commercial real estate loans and reflects our continued efforts and progress in developing a robust commercial banking platform. We also continue to build a productive small business administration ("SBA") lending group and it is providing a consistent source of gain-on-sale income. We expect to see an increasing level of deposit inflow from our new commercial relationships and an increase should drive improvement in our deposit mix and reduce our cost of funds. We continue to have a strong loan pipeline which we expect will drive balance sheet growth and steady improvement in our level of profitability over the second half of 2014. Substantial progress in resolving nonperforming assets and other cost containment efforts have resulted in reduced noninterest expenses that will continue to enhance profitability."

Q2 2014 vs Q1 2014. Net interest income decreased $218 thousand, or 2.8%, for the three months ended June 30, 2014 as compared to the three months ended March 31, 2014, primarily as a result of:
• A decrease in interest income of $153 thousand, or 1.6%, primarily attributable to a decrease in interest earned on loans as a result of a slightly lower yield for the three months ended June 30, 2014 as compared to the three months ended March 31, 2014. This decrease was partially offset by a higher average loan balance during the three months ended June 30, 2014 as compared to the three months ended March 31, 2014; and
• An increase in interest expense of $65 thousand, or 4.5%, due to an increase in the volume of certificates of deposit, partially offset by a decrease in the rates of interest paid on certificates of deposit.

Our net interest margin declined to 3.09% for the three months ended June 30, 2014 from 3.26% for the three months ended March 31, 2014, primarily attributable to a decrease in our average yield on interest earning assets to 3.70% for the three months ended June 30, 2014 from 3.86% for the three months ended March 31, 2014. Also contributing to the decline in our net interest margin was an increase in our cost of funds to 0.85% for the three months ended June 30, 2014 from 0.82% for the three months ended March 31, 2014.

Q2 2014 vs Q2 2013. Net interest income increased $255 thousand, or 3.5%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, primarily as a result of the increase in interest income, partially offset by the increase in interest expenses, as described below:
• The increase in interest income of $406 thousand, or 4.7%, was primarily attributable to an increase in interest earned on loans as a result of a higher average loan balance during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, partially offset by a decrease in the yield on loans; and
• The increase in interest expense of $151 thousand, or 11.1%, was due primarily to an increase in the volume of certificates of deposit partially offset by a decrease in the rates of interest paid on certificates of deposit.

YTD 2014 vs YTD 2013. Net interest income increased $937 thousand, or 6.4%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily as a result of an increase in interest income of $943 thousand, or 5.4%, primarily attributable to an increase in interest earned on loans as a result of a higher average loan balance during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

Provision for Loan and Lease Losses

Q2 2014 vs Q1 2014. The provision for loan and lease losses increased $150 thousand, or 33.3%, for the three months ended June 30, 2014 as compared to the three months ended March 31, 2014, primarily as a result of an increase in loan balances by $28.0 million during the second quarter of 2014 compared to $1.8 million in the first quarter of 2014. In addition, we had net recoveries of $40 thousand for the three months ended June 30, 2014 versus net recoveries of $132 thousand for the three months ended March 31, 2014.

Q2 2014 vs Q2 2013. The provision for loan and lease losses increased $600 thousand, or 100.0%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, primarily as a result of an increase in loan balances by $28.0 million for the three months ended June 30, 2014 compared to $14.3 million for the three months ended June 30, 2013.

YTD 2014 vs YTD 2013. The provision for loan and lease losses decreased $100 thousand, or 8.7%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily as a result of net recoveries of $172 thousand for the six months ended June 30, 2014, along with increased loan balances of $29.8 million in the first half of 2014 compared to net charge-offs of $908 thousand during the six months ended June 30, 2013 and a decrease in loan balances of $1.4 million for the same period.

Noninterest Income

Q2 2014 vs Q1 2014. Noninterest income decreased $85 thousand, or 6.6%, for the three months June 30, 2014 as compared to the three months ended March 31, 2014, primarily as a result of a $212 thousand, or 30.9%, decrease in net gain on sale of SBA loans.

Q2 2014 vs Q2 2013. Noninterest income increased by $1.5 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 primarily as a result of:
• A $474 thousand increase in net gain on sale of SBA loans;
• A $224 thousand increase in income from real properties acquired by or in lieu of loan foreclosures (commonly referred to as other real estate owned or "OREO"); and
• No sales of loans in the current period as compared to a net loss on the sale of loans of $576 thousand for the three months ended June 30, 2013.

YTD 2014 vs YTD 2013. Noninterest income increased $2.3 million, or 1,363.7%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily as a result of:
• An increase of $1.2 million in net gain on sale of SBA loans;
• An increase of $273 thousand in income from OREO; and
• No sales of loans in the current period as compared to a net loss on the sale of loans of $485 thousand for the six months ended June 30, 2013.

Noninterest Expense

Q2 2014 vs Q1 2014. Noninterest expense decreased $418 thousand, or 4.4%, for the three months ended June 30, 2014 as compared to the three months ended March 31, 2014, primarily as a result of:
• A decrease of $323 thousand in carrying costs and other expenses incurred in connection with OREO as a result of higher expenses during the first quarter of 2014 due to a write down taken on one OREO property; and
• A decrease of $184 thousand in salaries and employee benefits primarily related to a partial refund received in the second quarter for health care insurance costs charged in the first quarter; partially offset by
• An increase of $175 thousand in our legal expenses as a result of a settlement of a legal dispute in the second quarter of 2014.

Q2 2014 vs Q2 2013. Noninterest expense decreased $718 thousand, or 7.4%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, as a result of:
• A decrease of $707 thousand in OREO expenses attributable to the reduction in OREO properties during the previous 12-month period; and
• A decrease of $355 thousand in professional fees related to decreased legal expenses due to the resolution of certain lawsuits and other disputes and a decline in nonperforming loans; partially offset by
• An increase of $270 thousand in salaries and employee benefits related to the hiring of key employees during 2013, increases in health care insurance costs, and increases in workers' compensation premiums.

YTD 2014 vs YTD 2013. Noninterest expense decreased $1.6 million, or 7.9%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily as a result of:
• A decrease of $2.0 million in OREO expenses attributable to the reduction in OREO properties during the previous 12-month period; and
• A decrease of $1.1 million in professional fees related to decreased legal expenses due to the resolution of certain lawsuits and other disputes and a decline in nonperforming loans; partially offset by
• An increase of $1.5 million in salaries and employee benefits related to the hiring of key employees during 2013, increases in health care insurance costs, and increases in workers' compensation premiums.

Income tax provision (benefit)

For each of the three months ended June 30, 2014, March 31, 2014 and June 30, 2013, we recorded no income tax provision. We had no income tax provision for the first and second quarters of 2014 as a result of the utilization of a net operating loss ("NOL") credit against our taxable income in the current year. We had no income tax provision for the second quarter of 2013 as we had a pre-tax loss of $2.6 million.

We had no income tax provision for the six months ended June 30, 2014 as a result of the utilization of the NOL credit against our taxable income in the current year. The tax benefit of $1.3 million for the six months ended June 30, 2013 was primarily related to the release of the remainder of a valuation allowance in the first quarter of 2013, which we had established against our deferred tax assets by means of non-cash charges to the provision for income taxes prior to 2013.

Discontinued operations

For the three months ended June 30, 2014 and March 31, 2014, we had net income related to our discontinued operations of $772 thousand and $1.2 million, respectively, as compared to a net loss from discontinued operations of $518 thousand for the three months ended June 30, 2013. The net income from discontinued operations for the three months ended June 30, 2014 was primarily attributable to a partial reversal of our repurchase reserve as a result of our sale of the mortgage servicing rights in April 2014. The net income from discontinued operations for the three months ended March 31, 2014 was primarily the result of an increase in the fair value of our mortgage servicing rights. The net loss from discontinued operations for the three months ended June 30, 2013 primarily related to higher expenses than incoming revenues related to the mortgage banking division.

For the six months ended June 30, 2014, we had net income related to our discontinued operations of $2.0 million as compared to a net loss of $1.2 million for the six months ended June 30, 2013. The net income from discontinued operations for the six months ended June 30, 2014 was attributable to the gain on the sale of the mortgage servicing rights in connection with the closure of our mortgage banking business, and the partial reversal of our repurchase reserve as a result of our sale of the mortgage servicing rights. The net loss from discontinued operations for the six months ended June 30, 2013 primarily related to higher expenses than incoming revenues related to our former mortgage banking business.

Balance Sheet Information

Loans

As indicated in the table below, at June 30, 2014 gross loans totaled approximately $806.6 million, which represented an increase of $28.0 million, or 3.6%, from gross loans outstanding at March 31, 2014, and an increase of $29.8 million, or 3.8%, from the gross loans outstanding at December 31, 2013. The following table sets forth the composition, by loan category, of our loan portfolio at June 30, 2014, March 31, 2014 and December 31, 2013.


Q2 2014 vs Q1 2014. Net interest income decreased $218 thousand, or 2.8%, for the three months ended June 30, 2014 as compared to the three months ended March 31, 2014, primarily as a result of:
• A decrease in interest income of $153 thousand, or 1.6%, primarily attributable to a decrease in interest earned on loans as a result of a slightly lower yield for the three months ended June 30, 2014 as compared to the three months ended March 31, 2014. This decrease was partially offset by a higher average loan balance during the three months ended June 30, 2014 as compared to the three months ended March 31, 2014; and
• An increase in interest expense of $65 thousand, or 4.5%, due to an increase in the volume of certificates of deposit, partially offset by a decrease in the rates of interest paid on certificates of deposit.

Our net interest margin declined to 3.09% for the three months ended June 30, 2014 from 3.26% for the three months ended March 31, 2014, primarily attributable to a decrease in our average yield on interest earning assets to 3.70% for the three months ended June 30, 2014 from 3.86% for the three months ended March 31, 2014. Also contributing to the decline in our net interest margin was an increase in our cost of funds to 0.85% for the three months ended June 30, 2014 from 0.82% for the three months ended March 31, 2014.

Q2 2014 vs Q2 2013. Net interest income increased $255 thousand, or 3.5%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, primarily as a result of the increase in interest income, partially offset by the increase in interest expenses, as described below:
• The increase in interest income of $406 thousand, or 4.7%, was primarily attributable to an increase in interest earned on loans as a result of a higher average loan balance during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, partially offset by a decrease in the yield on loans; and
• The increase in interest expense of $151 thousand, or 11.1%, was due primarily to an increase in the volume of certificates of deposit partially offset by a decrease in the rates of interest paid on certificates of deposit.

YTD 2014 vs YTD 2013. Net interest income increased $937 thousand, or 6.4%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily as a result of an increase in interest income of $943 thousand, or 5.4%, primarily attributable to an increase in interest earned on loans as a result of a higher average loan balance during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

Provision for Loan and Lease Losses

Q2 2014 vs Q1 2014. The provision for loan and lease losses increased $150 thousand, or 33.3%, for the three months ended June 30, 2014 as compared to the three months ended March 31, 2014, primarily as a result of an increase in loan balances by $28.0 million during the second quarter of 2014 compared to $1.8 million in the first quarter of 2014. In addition, we had net recoveries of $40 thousand for the three months ended June 30, 2014 versus net recoveries of $132 thousand for the three months ended March 31, 2014.

Q2 2014 vs Q2 2013. The provision for loan and lease losses increased $600 thousand, or 100.0%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, primarily as a result of an increase in loan balances by $28.0 million for the three months ended June 30, 2014 compared to $14.3 million for the three months ended June 30, 2013.

YTD 2014 vs YTD 2013. The provision for loan and lease losses decreased $100 thousand, or 8.7%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily as a result of net recoveries of $172 thousand for the six months ended June 30, 2014, along with increased loan balances of $29.8 million in the first half of 2014 compared to net charge-offs of $908 thousand during the six months ended June 30, 2013 and a decrease in loan balances of $1.4 million for the same period.

Noninterest Income

Q2 2014 vs Q1 2014. Noninterest income decreased $85 thousand, or 6.6%, for the three months June 30, 2014 as compared to the three months ended March 31, 2014, primarily as a result of a $212 thousand, or 30.9%, decrease in net gain on sale of SBA loans.

Q2 2014 vs Q2 2013. Noninterest income increased by $1.5 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 primarily as a result of:
• A $474 thousand increase in net gain on sale of SBA loans;
• A $224 thousand increase in income from real properties acquired by or in lieu of loan foreclosures (commonly referred to as other real estate owned or "OREO"); and
• No sales of loans in the current period as compared to a net loss on the sale of loans of $576 thousand for the three months ended June 30, 2013.

YTD 2014 vs YTD 2013. Noninterest income increased $2.3 million, or 1,363.7%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily as a result of:
• An increase of $1.2 million in net gain on sale of SBA loans;
• An increase of $273 thousand in income from OREO; and
• No sales of loans in the current period as compared to a net loss on the sale of loans of $485 thousand for the six months ended June 30, 2013.

Noninterest Expense

Q2 2014 vs Q1 2014. Noninterest expense decreased $418 thousand, or 4.4%, for the three months ended June 30, 2014 as compared to the three months ended March 31, 2014, primarily as a result of:
• A decrease of $323 thousand in carrying costs and other expenses incurred in connection with OREO as a result of higher expenses during the first quarter of 2014 due to a write down taken on one OREO property; and
• A decrease of $184 thousand in salaries and employee benefits primarily related to a partial refund received in the second quarter for health care insurance costs charged in the first quarter; partially offset by
• An increase of $175 thousand in our legal expenses as a result of a settlement of a legal dispute in the second quarter of 2014.

Q2 2014 vs Q2 2013. Noninterest expense decreased $718 thousand, or 7.4%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, as a result of:
• A decrease of $707 thousand in OREO expenses attributable to the reduction in OREO properties during the previous 12-month period; and
• A decrease of $355 thousand in professional fees related to decreased legal expenses due to the resolution of certain lawsuits and other disputes and a decline in nonperforming loans; partially offset by
• An increase of $270 thousand in salaries and employee benefits related to the hiring of key employees during 2013, increases in health care insurance costs, and increases in workers' compensation premiums.

YTD 2014 vs YTD 2013. Noninterest expense decreased $1.6 million, or 7.9%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily as a result of:
• A decrease of $2.0 million in OREO expenses attributable to the reduction in OREO properties during the previous 12-month period; and
• A decrease of $1.1 million in professional fees related to decreased legal expenses due to the resolution of certain lawsuits and other disputes and a decline in nonperforming loans; partially offset by
• An increase of $1.5 million in salaries and employee benefits related to the hiring of key employees during 2013, increases in health care insurance costs, and increases in workers' compensation premiums.

Income tax provision (benefit)

For each of the three months ended June 30, 2014, March 31, 2014 and June 30, 2013, we recorded no income tax provision. We had no income tax provision for the first and second quarters of 2014 as a result of the utilization of a net operating loss ("NOL") credit against our taxable income in the current year. We had no income tax provision for the second quarter of 2013 as we had a pre-tax loss of $2.6 million.

We had no income tax provision for the six months ended June 30, 2014 as a result of the utilization of the NOL credit against our taxable income in the current year. The tax benefit of $1.3 million for the six months ended June 30, 2013 was primarily related to the release of the remainder of a valuation allowance in the first quarter of 2013, which we had established against our deferred tax assets by means of non-cash charges to the provision for income taxes prior to 2013.

Discontinued operations

For the three months ended June 30, 2014 and March 31, 2014, we had net income related to our discontinued operations of $772 thousand and $1.2 million, respectively, as compared to a net loss from discontinued operations of $518 thousand for the three months ended June 30, 2013. The net income from discontinued operations for the three months ended June 30, 2014 was primarily attributable to a partial reversal of our repurchase reserve as a result of our sale of the mortgage servicing rights in April 2014. The net income from discontinued operations for the three months ended March 31, 2014 was primarily the result of an increase in the fair value of our mortgage servicing rights. The net loss from discontinued operations for the three months ended June 30, 2013 primarily related to higher expenses than incoming revenues related to the mortgage banking division.

For the six months ended June 30, 2014, we had net income related to our discontinued operations of $2.0 million as compared to a net loss of $1.2 million for the six months ended June 30, 2013. The net income from discontinued operations for the six months ended June 30, 2014 was attributable to the gain on the sale of the mortgage servicing rights in connection with the closure of our mortgage banking business, and the partial reversal of our repurchase reserve as a result of our sale of the mortgage servicing rights. The net loss from discontinued operations for the six months ended June 30, 2013 primarily related to higher expenses than incoming revenues related to our former mortgage banking business.

Balance Sheet Information

Loans

As indicated in the table below, at June 30, 2014 gross loans totaled approximately $806.6 million, which represented an increase of $28.0 million, or 3.6%, from gross loans outstanding at March 31, 2014, and an increase of $29.8 million, or 3.8%, from the gross loans outstanding at December 31, 2013. The following table sets forth the composition, by loan category, of our loan portfolio at June 30, 2014, March 31, 2014 and December 31, 2013.

Deposits

The decrease in our total deposits from March 31, 2014 to June 30, 2014 is primarily attributable to customers withdrawing funds to pay their tax payments, which they had built up in the previous quarter. As a result, our lower priced core deposits decreased to 45%, and higher priced time deposits increased to 55%, of total deposits at June 30, 2014, as compared to 46% and 54% of total deposits, respectively, at March 31, 2014.

The increase in certificates of deposit from December 31, 2013 was primarily the result of our decision to increase our deposit base and improve our loan-to-deposit ratio. Due primarily to that decision and the resulting increase in certificates of deposit, lower priced core deposits decreased to 45%, and higher priced time deposits increased to 55%, of total deposits at June 30, 2014, as compared to 51% and 49%, respectively, at December 31, 2013.

Asset Quality

Nonperforming Assets

Nonperforming assets at June 30, 2014 increased $2.3 million from March 31, 2014 as a result of a $3.6 million increase in non-performing loans, partially offset by a decrease of $1.6 million in other non-performing assets in the second quarter of 2014. Non-performing loans increased to $11.6 million at June 30, 2014 from $8.0 million at March 31, 2014, which was primarily attributable to a $2.7 million loan relationship moved to non-accrual status, which consists of a $947 thousand commercial loan and $1.8 million in commercial real estate loans. The decrease in other non-performing assets at June 30, 2014 compared to March 31, 2014 relates to one investment security moving to accrual status.

Allowance for loan and lease losses

At June 30, 2014, the allowance for loan and lease losses ("ALLL") totaled $12.6 million, which was approximately $640 thousand more than at March 31, 2014 and $1.5 million more than at June 30, 2013. The ALLL activity during the six months ended June 30, 2014 included net recoveries of $172 thousand, combined with a $600 thousand provision that we made for possible loan and lease losses. The ratio of the ALLL-to-total loans outstanding as of June 30, 2014 was 1.56% as compared to 1.53% as of both March 31, 2014 and June 30, 2013.

Capital Resources

At June 30, 2014, we had total regulatory capital on a consolidated basis of approximately $139.8 million, and Pacific Mercantile Bank (the "Bank"), our wholly owned banking subsidiary, had total regulatory capital of approximately $119.8 million. The ratio of the Bank's total capital-to-risk weighted assets, which is the principal federal bank regulatory measure of the financial strength of banking institutions, was 14.9% and, as a result, the Bank continued to be classified, under federal bank regulatory guidelines, as a "well-capitalized" banking institution, which is the highest of the capital standards established by federal banking regulatory authorities.

About Pacific Mercantile Bancorp

Pacific Mercantile Bancorp is the parent holding company of Pacific Mercantile Bank, which opened for business March 1, 1999. The Bank, which is an FDIC insured, California state-chartered bank and a member of the Federal Reserve System, provides a wide range of commercial banking services to businesses, business professionals and individual clients through its combination of traditional banking financial centers and comprehensive, sophisticated electronic banking services.

The Bank operates a total of seven financial centers in Southern California, four in Orange County and one each in Los Angeles and San Diego County, and another in San Bernardino County. The four Orange County financial centers are located in the cities of Newport Beach, Costa Mesa, La Habra and San Juan Capistrano. Our Los Angeles County financial center is located in the city of Beverly Hills. Our San Diego County financial center is located in La Jolla and our San Bernardino County financial center is located in the city of Ontario. In addition, the Bank offers comprehensive online banking services accessible at www.pmbank.com.





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