Pacific Mercantile Bancorp (PMBC)

[Enterprising Investor]

PMBC Reports Fiscal 2012 Operating Results (3/07/13)

COSTA MESA, Calif., March 7, 2013 (GLOBE NEWSWIRE) -- Pacific Mercantile Bancorp (Nasdaq:PMBC) today reported its results of operation for the fiscal year and fourth quarter ended December 31, 2012.

Fiscal 2012 vs. Fiscal 2011.

Pretax Income. In the year ended December 31, 2012, pre-tax income increased by $1.5 million, or 28.7%, to nearly $6.7 million from $5.2 million in the year ended December 31, 2011. That increase was primarily attributable to a $20.3 million increase in noninterest income, which more than offset a $16.0 million increase in noninterest expense and a $2.8 million increase in the provision for loan losses in 2012, as compared to 2011.

Net Income and Income per Diluted Share. Notwithstanding the increase in pre-tax income, net income declined by 17.0% to approximately $9.7 million in the year ended December 31, 2012 from $11.6 million in the year ended December 31, 2011. That decrease was due to a $3.4 million reduction in income tax benefits to $3.0 million in 2012 from $6.4 million in 2011. These income tax benefits were attributable to reductions, in both 2012 and 2011, in a reserve established in prior years against our deferred tax asset. Of the $9.7 million of net income earned in 2012, approximately $8.7 million was allocable to the holders of our common stock and approximately $1.0 million was allocable to the holders of our preferred stock.

Income per diluted share of common stock was $0.55 for 2012, as compared to $0.98 per diluted share in 2011. That decrease was due not only to the lower income tax benefits in 2012, but also to a 55% increase in the weighted average number of shares outstanding in 2012, as compared to 2011, which was primarily attributable to our sale, in a private placement, of a total of 4,201,278 shares of our common stock in April 2012 at a price of $6.26 per share.

Fourth Quarter 2012 vs. Fourth Quarter 2011.

Pretax Income (Loss). We recorded a pretax loss of $2.6 million in the fourth quarter of 2012, as compared to pre-tax income of $1.0 million in the same quarter of 2011. This decline was primarily attributable to a $3.4 million, or 33%, increase in non-interest expense, partially offset by a $600,000 increase in non-interest income, in each case as compared to the fourth quarter of 2011.

Net Income (Loss) and Income (Loss) per Diluted Share. We recorded a net loss in the fourth quarter of 2012 of $882,000, as compared to net income of $7.9 million in the same quarter of 2011. That swing from net income to a net loss was primarily attributable to a $5.2 million, or 76%, decrease in income tax benefits in the fourth quarter of 2012, as compared to the same quarter of 2011. We recorded a loss per diluted share of $0.07 in the fourth quarter of 2012, from income per diluted share of $0.62 in the same quarter of 2011, due not only to the fourth quarter 2012 net loss, but also to a 55% increase in the weighted average number of shares outstanding during that quarter, which was primarily the result of the April 2012 sale of 4,201,278 shares of our common stock.

"The expected injection of $15 million of capital from the Carpenter Funds, which was announced on Tuesday of this week, will strengthen the Bank's financial condition, enabling us to increase the resources available for our core banking competencies" stated Raymond E. Dellerba, President and CEO of the Company. "Assuming the economic recovery continues, we expect to see growth in our commercial loan division, our SBA Division and our entertainment industries division in 2013. Additionally, we plan to grow our import/export and technology lending businesses, with the hiring of expertise in both areas," noted Mr. Dellerba. "On the deposit side, we will be continuing programs, initiated in 2011, to further increase lower-cost demand deposits, with the goal of reducing our reliance on more expensive time certificates of deposit for funding loans and investments. Additionally, we also will be focusing on building our retail mortgage banking division under new leadership." Mr. Dellerba concluded, "In short, we will be putting our new capital to work for our customers, shareholders and our hardworking, loyal and re-energized employees."

Results of Operations

Net Interest Income. In fiscal 2012, net interest income increased by $80,000, or 0.2%, to $33.3 million, from $33.2 million in fiscal 2011. That increase was primarily attributable to a $2.6 million, or 23.0%, decline in interest expense, substantially offset by a $2.5 million, or 5.6%, decrease in interest income in 2012, as compared to 2011. 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 1.11% in 2012 from 1.43% in 2011. Also contributing, to a lesser extent, to that decline was a $18 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 2012, as compared to 2011, was primarily attributable to the continued low interest rates as a result of the Federal Reserve Board monetary policy, which affected the interest rates we were able to earn on those of our loans and investments which re-priced at lower rates during 2012. Primarily as a result of the decrease in interest income, our net interest margin declined to 3.29% for the year ended December 31, 2012 from 3.41% for the year ended December 31, 2011.

In the fourth quarter of 2012, net interest income increased by $40,000, or 0.5%, to nearly $7.9 million from $7.8 million in the fourth quarter of 2011. That increase was the result of a $700,000, or 26.5%, decrease in interest expense, which was partially offset by a $650,000, or 6.3%, reduction in interest income due primarily to a decrease in average earning assets.

Provision for Loan Losses and Net Interest Income after Provision for Loan Losses. We made provisions for loan losses of nearly $2.0 million during the fiscal year ended December 31, 2012, as compared to an $833,000 reversal to the provision for loan losses in 2011. This increase in the provision for loan losses in 2012 was made as a result of the recognition of $6.7 million of net loan charge-offs. Notwithstanding those net loan charge-offs, we were able to reduce the allowance for loan losses to $10.9 million, or 1.49% of the loans outstanding, at December 31, 2012, from $15.6 million, or 2.37% of the loans outstanding, at December 31, 2011. That reduction was made possible primarily by a combination of factors including net transfers of $12.6 million of loans, which had been classified as "special mention" or "substandard as of December 31, 2011, to "pass" at December 31, 2012, primarily as a result of improvements in the financial condition and cash flows of borrowers which enabled them to increase their principal and interest payments on those loans and a change in the composition of our loan portfolio to a higher proportion of apartment, single family and SBA loans with respect to which we have, in the past, incurred lower levels of loan losses than with respect to commercial and other loans. As a result, based on the methodologies we use to assess asset quality, bank regulatory guidelines and our historical loan loss history, we believe that that allowance for loan losses at December 31, 2012 remained adequate to cover inherent losses in the loan portfolio.

Noninterest income. Noninterest income increased by $20.3 million, or 246.3%, in the year ended December 31, 2012, primarily as a result of a $19.2 million, or 316.1%, increase in mortgage banking revenues and a $1.7 million increase in gains on sales of securities held for sale, in each case as compared to 2011. During the fourth quarter of 2012, non-interest income increased by $600,000, or 21.4%, to $3.4 million, from $2.8 million in 2011, as a result of a $600,000 increase in mortgage banking revenues, primarily due to increases in the volume of residential mortgage loans we originated in the year. However, the rate of growth in our mortgage banking revenues in the fourth quarter of 2012 declined when compared to the rate of growth achieved in the prior three quarters of 2012, in each case as compared to its respective corresponding quarter of 2011, and we expect to see a further slowing in the growth or even a decline in such revenues during 2013, due primarily to our exit from the wholesale mortgage business effective August 31, 2012.

Noninterest expense. Noninterest expense in 2012 increased by $16 million, or 43.4%, as compared to 2011, due primarily to a (i) $9.0 million, or 52.8%, increase in compensation expense, attributable primarily to an increase in staffing in the mortgage loan division during the first three quarters of 2012 to make it possible to take advantage of an increase in demand for residential mortgage loans and, to a lesser extent, the addition of management personnel at the Bank in the second half of 2012 to grow our commercial banking business and to manage and dispose of nonperforming assets at the Bank, (ii) an increase of $3.4 million, or 106.5%, principally in connection with write-downs of other real estate owned ("OREO") to their fair values, and (iii) a $1.9 million, or 253.5%, increase in mortgage related loan expense as a result of increased mortgage loan volume and the expenses of exiting the wholesale mortgage business.

In the fourth quarter of 2012, non-interest expense increased by $3.4 million, or 32.5%, as compared to the same quarter of 2011, due primarily to increases of (i) $1.8 million, or 37%, in compensation expense, primarily attributable to bonus compensation and commissions paid on mortgage loans funded in the fourth quarter of 2012 and the above-described addition of management personnel at the Bank; (ii) $670,000, or 213.4%, in mortgage related loan expense, also attributable to an increase in the volume of mortgage loans processed, which included mortgage loans for which funding commitments had been made in the third quarter of 2012, and expenses incurred in connection with the exit from the wholesale mortgage business, and (iii) $470,000, or 38.8%, in expenses incurred in connection with write downs to fair value and the management and disposition of OREO.

Income Tax Provision (Benefit). During 2008 and 2010 we created a valuation allowance against our deferred tax asset totaling $13.7 million, due to uncertainties as to our ability to fully use that deferred tax asset to reduce or offset income taxes in future years. During 2011, we released $7.0 million of that valuation allowance based on an assessment that, due to a strengthening of economic conditions, improvements in the quality of our loan portfolio and our improving results of operations, it had become more likely, than not, that we would be able to use $7 million of the deferred tax asset to reduce or offset income taxes in future periods. That reduction was effectuated through the recognition of a $6.4 million non-cash tax benefit in our consolidated statement of operations for the year ended December 31, 2011. During 2012, we released the remaining valuation allowance of $6.6 million based on an assessment that, due primarily to a further strengthening of economic conditions and a further increase in our earnings, it had become more likely, than not, that we would be able to use the remaining deferred tax asset to reduce or offset income taxes in future periods. That reduction in the valuation allowance was effectuated through the recognition of a $3.0 million non-cash tax benefit in our consolidated statement of operations for the year ended December 31, 2012.

Financial Condition

Loans. During 2012, the average volume of loans outstanding decreased to $698 million from $709 million in 2011, primarily reflecting the effects on loan demand of the sluggishness, and continuing uncertainties about the strength, of the economic recovery in early 2012. The economic recovery regained momentum towards the third quarter of 2012 and, as a result, gross loans totaled approximately $730 million at December 31, 2012, which represented a $72 million, or 10.9%, increase from the nearly $658 million of gross loans outstanding at December 31, 2011.

Deposits. Deposits decreased by $17 million, or 1.9%, to $845 million at December 31, 2012, from $862 million at December 31, 2011, primarily as a result of a decrease of $29 million, or 5.6%, in time deposits, partially offset by an increase in core deposits, comprised of a $6 million, or 3.6%, increase in noninterest bearing demand deposits and a $8 million, or 5.0% increase in savings and money market deposits. As a result, the volume of lower-cost core deposits increased to 43.1% of total deposits at December 31, 2012 from 40.9% at December 31, 2011, while higher-cost time deposits decreased as a percentage of total deposits to 56.9% at December 31, 2012 from 59.1% at December 31, 2011.

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