Pacific Mercantile Bancorp (PMBC)

[Enterprising Investor]

PMBC Reports Fiscal 2011 Operating Results (2/28/12)

Income before Taxes Improves to $5.2 million

Net Income Increases to $11.6 million

COSTA MESA, Calif., Feb. 28, 2012 (GLOBE NEWSWIRE) -- Pacific Mercantile Bancorp (Nasdaq:PMBC) today reported that income before income taxes increased to $5.2 million, and net income increased to $11.6 million, or $0.98 per diluted share, in the year ended 2011, as compared to a pre-tax loss of $5.0 million and a net loss of $14.0 million, or $1.44 per diluted share, in 2010. The increase in pre-tax income in 2011 was primarily attributable a reduction in provision for loan losses of $9.1 million, and an increase in non-interest income of $1.4 million, in each case as compared to 2010. The increases in net income and net income per diluted share were attributable to that reduction in the provision for loan losses and the increase in non-interest income, coupled with an income tax benefit of $6.4 million, as compared to a provision for income taxes of nearly $9.0 million in 2010. The income tax benefit was the result of a $7.0 million reversal, made possible by the improvements in our 2011 operating results, of charges taken to increase reserves against our deferred asset in 2010.

Income before income taxes increased to $1.0 million, and net income for the fourth quarter of 2011 increased to $7.9 million, or $0.62 per diluted share, as compared to pre-tax loss of $2.1 million and a net loss of $2.0 million, or $0.22 per diluted share, incurred in the same quarter of 2010. This improvement was primarily attributable to (i) a $1.6 million reduction in provision for loan losses, (ii) an increase in non-interest income of $1.4 million, (iii) a decrease in non-interest expense of $542,000 and (iv) an income tax benefit of $6.7 million, in each case as compared to the fourth quarter of 2010.

"I am pleased to report our return to profitability in 2011, which was the result of improvements in our operating results and in the quality of our loan portfolio," stated Raymond E. Dellerba, President and CEO of the Company and the Bank. "Banking revenues, consisting of net interest income and non-interest income increased every quarter during 2011, and by nearly 10% in the fourth quarter of 2011, despite a continuing sluggishness in and uncertainties regarding the strength of the economic recovery, which dampened loan demand in 2011. At the same time, due to the improvement in the quality of our loan portfolio, exemplified by reductions in loan charge-offs and delinquencies, we were able to reverse the provisions made for loan losses in 2011, as compared to provisions of $8.3 million made for loan losses in 2010. If the economic recovery strengthens and loan demand increases in 2012, we believe we will be able to achieve improvements in our net interest income and non-interest income and in the quality of our loan portfolio in 2012," stated Mr. Dellerba. "I also want to take this opportunity to thank the members of our management team for the efforts they devoted and the energies they expended, without which our return to profitability in 2011 could not have been achieved," added Mr. Dellerba.

Results of Operations

Net Interest Income. In fiscal 2011, net interest income increased by $353,000, or 1.1%, to $33.2 million, from $32.8 million in fiscal 2010. That increase was primarily attributable to a $7.0 million, or 38.6%, decline in interest expense, substantially offset by a $6.6 million, or 13.0%, decrease in interest income in 2011, as compared to 2010. The decline in interest expense was due primarily to reductions in market rates of interest, as a result of which the average rate of interest that we paid on our interest-bearing liabilities declined to 1.43% in 2011 from 1.98% in 2010. Also contributing, to a lesser extent, to that decline was a $34 million reduction in average borrowings outstanding and a change in the mix of our deposits to a higher proportion of lower-cost "core" deposits and a lower proportion of higher-cost certificates of deposits. The decline in interest income in 2011, as compared to 2010, was primarily attributable to the Federal Reserve Board's reductions in interest rates, which reduced the yields that we were able to realize on our loans and investments and, to a lesser extent, to a decline in average loans outstanding reflecting continuing weakness in loan demand which we believe was primarily attributable to the sluggishness of and uncertainties regarding the economic recovery in 2011.

In the fourth quarter of 2011, net interest income decreased by $441,000, or 5.3%, to $7.8 million from $8.3 million in the fourth quarter of 2010. That decrease was the result of a $1.6 million, or 13.3%, reduction in interest income due primarily to a decrease in average earning assets, partially offset by a $1.2 million, or 30.6%, decrease in interest expense.

Primarily as a result of the decreases in interest expense, our net interest margin improved to 3.41% for the year ended December 31, 2011, from 2.92% for 2010.

Provision for Loan Losses and Net Interest Income after Provision for Loan Losses. During the fiscal year ended December 31, 2011, we reversed the provision for loan losses by $833,000, as compared to making provisions for loans losses of $8.3 million in 2010. That reversal was made possible by an improvement in the quality of our loan portfolio, as evidenced by declines in net loan charge-offs and loan delinquencies and, to a lesser extent, by a decrease in total loans outstanding, in 2011 as compared in each case to 2010. Due to the reduction in the provisions made for loan losses, net interest income after those provisions increased by nearly $9.4 million, or 38.6%, to $34.0 million in 2011, as compared to $24.6 million in 2010. Although that reversal in the provisions made for loan losses resulted in a reduction in the amount of the allowance for loan losses at December 31, 2011, as compared to December 31, 2010, the ratio of the allowance to total loans outstanding at December 31, 2011 remained substantially unchanged at 2.37%, as compared to 2.44% at December 31, 2010.

Noninterest income. Noninterest income increased by $1.5 million, or 21.5%, due to a $2.4 million, or 62.3%, increase in mortgage banking revenues to $6.1 million in 2011, from $3.7 million in 2010. That increase was partially offset by a $1.1 million decline in gains on sales of securities held for sale in 2011 as compared to 2010. During the fourth quarter of 2011, non-interest income increased by $1.4 million, or 95.2%, to $2.8 million, from $1.4 million in 2010, as a result of a $1.5 million increase in mortgage banking revenues. The increases in mortgage banking revenues were primarily attributable to increases in the volume of residential mortgage loans we originated in the year and fourth quarter ended December 31, 2011 and the adoption of Accounting Standards Update ("ASU") 825, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (ASU 825), on mortgage loans held for sale as of December 1, 2011.

Noninterest expense. Noninterest expense in 2011 increased by $737,000, or 2.0%, as compared to 2010, due primarily to a $1.7 million, or 11.3%, increase in compensation expense, primarily attributable to an increase in staffing in the mortgage loan division to make it possible to take advantage of an increase in demand for residential mortgage loans, and an increase of nearly $1.1 million in provisions made for litigation and other contingencies. Those increases were substantially offset by a $1.5 million, or 40.7%, decrease in FDIC insurance assessments and an $830,000, or 17.5%, decrease in professional fees consisting of legal fees and expenses incurred principally in connection with the collection and foreclosures of non-performing loans and loan restructurings.

In the fourth quarter of 2011, non-interest expense decreased by $542,000, or 4.9%, as compared to the same quarter of 2010, due primarily to a $821,000, or 53.1%, decrease in professional fees and a $726,000, or 59%, decrease in FDIC deposit insurance premiums, which were somewhat offset by a $1.2 million, or 33.9%, increase in compensation expense and a $175,000 increase in the provisions made for contingencies.

Income before income taxes. Due primarily to the above-described increase in non-interest income and the reversal in the provisions made for loan losses, we generated pre-tax income of $5.2 million in 2011, which represented a $10.2 million improvement over the pre-tax loss of $5.0 million incurred in 2010. Fourth quarter 2011 pre-tax income improved by nearly $3.1 million, or 149%, to $1.0 million, from a pre-tax loss of $2.1 million in the fourth quarter of 2010, due primarily to the above described increases in net interest income and noninterest income, the $833,000 reversal of the provision for loan losses and the $542,000 reduction in non-interest expense in the fourth quarter of 2011.

Income Tax Provision (Benefit). We recorded a non-cash income tax benefit of $6.4 million in 2011 as a result of a $7.0 million release in the valuation allowance that we had established against our deferred tax asset, by means of charges to the provision for income taxes, in 2010. That reduction was based on an assessment we made in the fourth quarter of 2011 that, due to a strengthening of economic conditions, an improvement in the quality of our loan portfolio and the improvement in our results of operations in 2011, it had become more likely, than not, that we would be able to use approximately $7.0 million of the $15.0 million of income tax benefits comprising our deferred tax asset to offset or reduce income taxes in future periods.

By comparison, in 2010, we recognized a non-cash charge of $9.0 million to the provision for income taxes in order to increase the valuation allowance we had previously established against our deferred tax asset by $10.7 million. That increase was the result of a determination we made in the second quarter of 2010 that, due to the continuing weakness of the economy, the uncertainties about the strength of the economic recovery and our continuing losses, it had become more likely, than not, that we would be unable to use the remainder of our deferred tax asset to offset or reduce income taxes in future periods.

Financial Condition

Loans. During 2011, the average volume of loans outstanding decreased to $709 million from $787 million in 2010, primarily reflecting the effects on loan demand of the sluggishness, and continuing uncertainties about the strength, of the economic recovery. As a result, at December 31, 2011, gross loans totaled approximately $657 million, a decrease of $83 million, or 11.2%, as compared to nearly $740 million at December 31, 2010.

Deposits. Deposits increased by $46 million, or 5.6%, to $862 million at December 31, 2011, from $816 million at December 31, 2010, primarily as a result of an increase in core deposits, comprised of a $20 million, or 14.1%, increase in noninterest bearing demand deposits to $164 million at December 31, 2011 from $144 million at December 31, 2010 and a $24 million, or 18.1% increase in savings and other interest bearing transaction deposits, to $159 million at December 31, 2011, from $134 million at December 31, 2010. As a result, the volume of lower-cost core deposits increased to 40.9% of total deposits at December 31, 2011 from 37.7% at December 31, 2010, while higher-cost time deposits decreased as a percentage of total deposits to 59.1% at December 31, 2011 from 62.3% at December 31, 2010.

http://globenewswire.com/newsroom/news.html?d=247376