Pacific Mercantile Bancorp (PMBC)

[Enterprising Investor]

PMBC Reports Net Income of $5.8 Million in the Second Quarter of 2012 (8/16/12)

Six Consecutive Quarters of Net Income

COSTA MESA, Calif., Aug. 13, 2012 (GLOBE NEWSWIRE) -- Pacific Mercantile Bancorp (Nasdaq:PMBC) today reported its results of operations for the second quarter and six months ended June 30, 2012.

Overview

The Company's net income improved in this year's second quarter to $5.8 million, and $0.35 per diluted share, from $1.2 million, and 0.08 per diluted share, in the second quarter of 2011. This improvement was primarily attributable to an increase of $7.2 million in mortgage banking revenues to $8.5 million and a non cash income tax benefit of $4.1 million, in each case in the three months ended June 30, 2012. By comparison, we generated $1.3 million of mortgage banking revenues and we made a provision of $630,000 for income taxes in the three months ended June 30, 2011. Partially offsetting the increase in mortgage banking revenues and the income tax benefit were (i) a $448,000 decline in net interest income, (ii) a $1.9 million increase in the provision made for loan losses, and (iii) a $5.1 million increase in non-interest expense, in each case in the three months ended June 30, 2012, as compared to the same three months of 2011.

Net income for the six months ended June 30, 2012 increased to $7.2 million, or $0.47 per diluted share, from $2.9 million or $0.19 per diluted share in the same six months of 2011, due to (i) a $10.8 million increase in mortgage banking revenues to $13.0 million, (ii) a $1.1 million increase in net gains on sales of securities to $1.2 million, and (iii) a non-cash income tax benefit of $3.2 million, as compared to, respectively, mortgage banking revenues of $2.2 million, net gains of $40,000 on sales of securities, and a $630,000 provision for income taxes in the first six months of 2011. The positive effect of the increases in mortgage banking revenues and in net gains on sales of securities and the income tax benefit on our operating results for the six months ended June 30, 2012 was partially offset by a $1.0 million decline in net interest income, a $1.5 million increase in the provision made for loan losses, and a $9.0 million increase in non-interest expense to $25.9 million, in each case in the six months ended June 30, 2012, as compared to the same six months of 2011.

Raymond E. Dellerba, the Company's CEO and President stated, "We are very pleased to report our sixth consecutive profitable quarter. We continued to see strong results and are starting to experience an increase in demand for commercial and industrial lending in manufacturing, wholesale, distribution and medical, with Small Business Administration ("SBA") and Entertainment Financing leading the way". "On the deposit side, our lowest cost of funding, Demand Deposit Accounts ("DDAs"), grew from $150 million to $170 million, a 13.4% increase. The increase in our checking accounts indicates new business activity for our core Bank. We have a significant amount of Other Real Estate Owned ("OREO") in escrow and anticipate a substantial OREO reduction in the third quarter," reported Mr. Dellerba. "We want to thank our loyal employees, investors and Board of Directors for their efforts and support to make these financial results a reality," concluded President Dellerba.

Recent Developments

We recently undertook a review of our mortgage banking business, which has grown rapidly over a relatively short period of time. The purpose of the review was to determine actions that could be taken to redeploy some of our capital resources, currently committed to our mortgage banking business, to our core commercial lending business in preparation for an eventual increase in prevailing interest rates, and to reduce the costs and improve the efficiencies of our mortgage banking operations. Based on that review, a decision has been made to focus our mortgage operations entirely on our direct-to-consumer retail channel and to exit our wholesale mortgage business, which depends on independent mortgage brokers to originate mortgage loans for us. Consequently, we will cease taking mortgage submissions from mortgage brokers after August 31, 2012; but will continue to process and fund all mortgage broker-originated loans in process or originated on our before that date. This action will result in a significant reduction in mortgage loan originations and, therefore, in our mortgage banking revenues, in future periods. Nevertheless, in our view, this action is in the best interests of the Company and our shareholders, because we believe that it will enable us to build a stronger foundation for achieving improved profitability in the future, reduce and control our operating costs and reduce interest rate and other risks inherent in the wholesale mortgage business, in order to enhance the value of our banking franchise in the future.

Results of Operation

Net Interest Income. Net interest income in the three and six months ended June 30, 2012 decreased by $448,000 and $1.0 million, respectively, as compared to the same respective periods of 2011, due primarily to reductions in interest income of $1.1 million and $2.3 million in the three and six months ended June 30, 2012. Those decreases were somewhat offset by reductions in interest expense of $656,000 and $1.2 million, respectively, in the three and six months ended June 30, 2012, as compared to the same respective periods of 2011. The declines in interest income were primarily attributable to decreases in market rates of interest and, to a lesser extent, a decrease in the volume of securities held for sale and a modest decrease in the average volume of loans outstanding. The decreases in interest expense were due to reductions in the interest we paid on deposits and a change in the mix of deposits to a higher proportion of demand and savings deposits and a lower proportion of more expensive time deposits, as we chose to allow a run-off of some of those deposits.

Provision for Loan Losses. We made provisions for loan losses of $1.9 million and $1.5 million, respectively, in the three and six months ended June 30, 2012, primarily to increase, by $1.5 million, reserves for specific non-performing loans, thereby increasing those reserves to $4.2 million at June 30, 2012 from $2.7 million at December 31, 2011. The allowance for loan losses at June 30, 2012 totaled $14.6 million of the loans then outstanding, as compared to $15.6 million of the loans outstanding at December 31, 2011 and $17.4 million of the loans outstanding at June 30, 2011.

Non-interest income. Noninterest income increased by $7.3 million to $9.1 million in the second quarter of 2012, from nearly $1.9 million in the same quarter of 2011, primarily as a result of a $7.1 million increase in income generated by our mortgage banking operations. In the six months ended June 30, 2012, noninterest income increased by $11.9 million to $15.1 million from $3.2 million in the same six months of 2011, due primarily to a $10.8 million increase in income generated by the mortgage banking division and a $1.1 million increase in net gains on sales of securities available for sale.

Non-interest expense. In the three and six months ended June 30, 2012, noninterest expense increased by $5.1 million, or 59.5% and $9.0 million, or 53.7%, respectively, as compared to the same three and six months of 2011. Those increases were primarily attributable to (i) the growth of our mortgage banking operations, as we added employees, increased leased office space, and expanded our marketing and business development programs to support that growth, (ii) an increase in the carrying costs of other real estate owned (OREO expense), due to an increase in foreclosures by us of real properties that had collateralized non-performing loans, and (iii) increases in legal and other professional fees incurred primarily in connection with the collection and foreclosure of non-performing loans. Notwithstanding the increase in non-interest expense, in the three months ended June 30, 2012 our efficiency ratio (non-interest expense as a percentage of the sum of net interest income and non-interest income) improved to 79.22%, from 82.11% in the corresponding three months of 2011, as the increase in non-interest income outpaced the increase in non-interest expense. In the six months ended June 30, 2012, our efficiency ratio remained substantially unchanged at 82.77% as compared to 82.61% in the same six months of 2011.

Income tax provision (benefit). We recorded a non-cash income tax benefit of $4.1 million and $3.2 million, respectively, in the second quarter and the six months ended June 30, 2012, as a result of the release of the remainder of the valuation allowance, in the amount of $5.0 million, which we had established against our deferred tax asset by means of charges to the provision for income taxes in prior years. The release in the valuation allowance was based on an assessment we made in the second quarter of 2012 that, due primarily to the taxable earnings we have been generating from operations in every quarter since the quarter ended December 31, 2010, it had become more likely, than not, that we would be able to use the income tax benefits comprising our deferred tax asset to offset or reduce taxes in future periods.

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