Pacific Mercantile Bancorp (PMBC)

[Enterprising Investor]

Pacific Mercantile Bancorp Reports First Quarter 2013 Operating Results (5/14/13)

COSTA MESA, Calif., May 14, 2013 (GLOBE NEWSWIRE) -- Pacific Mercantile Bancorp (PMBC) today reported its results of operations for the first quarter ended March 31, 2012.

Overview

Pacific Mercantile Bancorp, reported that it incurred a net loss of $3.2 million, or $0.21 per diluted share, in the first three months of 2013, as compared to net income of $1.4 million, or $0.09 per diluted share, in the same three months of 2012. That loss was attributable to a number of factors, including (i) a $1.3 million, or 12.9%, decline in interest income, due primarily to continuing declines in prevailing market rates of interest; (ii) a $1.55 million increase in the provision for loan losses made primarily to offset $1.0 million of write-downs in the carrying values of certain nonperforming loans which were charged against the allowance for loan losses; (iii) a $4.0 million, or 66.3%, decline in noninterest income, of which $3.0 million was due to a decrease in mortgage banking revenues that resulted from our exit from the wholesale residential mortgage loan business in late August 2012, and (iv) a $1.1 million, or 9%, increase in noninterest expense. Partially offsetting the decline in interest income was a $669,000, or 29.2%, reduction in interest expense in this year's first quarter, as compared to the first quarter of 2012, that was primarily attributable to reductions in the volume of higher-cost time deposits due to a decision we made to not seek renewal of some of those deposits and decreases in interest rates on deposits and borrowings.

"I am pleased and privileged to join Pacific Mercantile Bank as its new President and CEO and look forward to the challenges and opportunities ahead to assist in guiding the Bank to the next level over the coming years," said Steven K. Buster, President and CEO of Pacific Mercantile Bank and Bancorp.

"The Bank embarked on a new strategy in the fourth quarter of 2012, a strategy we are now putting into play by refocusing the Bank, moving from disposing of problem loans and a workout management style to the enhancement of the following key areas; Commercial Loans along with Treasury Management and DDA Deposits, Small Business Association (SBA) Loans, Import-Export Loans, Entertainment Industry Financing and Mortgage Loans," stated the President.

Mr. Buster continued, "Thanks to the Carpenter Community BancFunds and the Clinton Group (SBAV LP), we have been successful in raising the capital we need to deploy in order to achieve the growth of these departments. In the Commercial Loan Division we have added a regional manager and additional loan officers with books of business, as well as a new treasury and cash management professional to bring in the DDA balances needed to fund those loans and to move us away from the higher costing time certificates of deposits (CDs). A new SBA manager has built a very seasoned SBA team to grow this department. Our Entertainment Industries Division has hired additional proven producers and will occupy their expanded facility this month. Our Import-Export Manager is now working with all branches in our market place to grow that department. We have hired a very experienced Mortgage Division Manager, who is re-focusing the mortgage department from wholesale to a retail focused group. "We believe that these are very positive, forward looking changes. The high caliber of new people employed have increased expenses for compensation, training, facilities, finance and accounting, and technology, for which we have received the strong support from our Board of Directors, enabling us to implement our strategy to move the Bank to the next level. I am very thankful to the Board for its foresight and support," concluded President Buster.

Results of Operations

Net Interest Income. In the three months ended March 31, 2013, net interest income decreased by $657,000, or 8.2%, due to a $1.3 million, or 12.9% decrease in interest income, which was only partially offset by a $669,000, or 29.2%, decrease in interest expense, in each case as compared to the same three months of 2012. The decrease in interest income was primarily attributable to a decrease in the average rate of interest earned on loans outstanding, to 4.62% for the first three months of 2013, from 5.19% in the same three months of 2012, which more than offset increases in the volume of our interest earning assets. The decrease in average interest rates earned on loans and other interest earning assets was primarily attributable to actions taken by the Federal Reserve Board designed to keep interest rates low as a means of stimulating economic growth. The decrease in interest expense was primarily attributable to reductions in the volume of higher priced time certificates of deposit and decreases in interest rates on deposits and borrowings, in the three months ended March 31, 2013 as compared to the same three months of 2012.

Provision for Loan Losses. At March 31, 2013, the allowance for loan losses (ALL) totaled $11.0 million, which was approximately $100,000, or 1.3%, higher than at December 31, 2012. ALL activity in the first three months of 2013 included provisions of $1.15 million made for possible loan losses, which more than offset net write-downs of $1.0 million of nonperforming loans which were charged to the ALL. The ratio of the ALL to total loans outstanding as of March 31, 2013 was 1.54% compared to 1.49% as of December 31, 2012.

Noninterest Income. The decline in noninterest income in the three months ended March 31, 2013, as compared to the same three months of 2012, was primarily attributable to a $3.0 million, or 64.9%, decrease in revenue generated by our mortgage banking business, and a decrease of $1.2 million in net gains on sales of securities available for sale. The decrease in mortgage banking revenue was primarily the result of declines in both mortgage loan originations and sales of mortgage loans in the secondary mortgage market due to our exit from the wholesale residential mortgage business in August 2012, which, as we had previously reported, was expected to result in a significant decrease in our mortgage banking revenues during 2013. The nearly $1.2 million decline in net gains on sales of securities in the first three months of 2013 was due primarily to a decrease in volume of sales of such securities to $6 million in the three months ended March 31, 2013, from approximately $135 million of sales of such securities in the three months ended March 31, 2012. The volume of sales of securities held for sale can vary, sometimes materially, from period to period, primarily in response to changes in interest rates in the securities markets.

Noninterest expense. Noninterest expense increased by $1.1 million, or 9.0%, in the first three months of 2013, as compared to the same period of 2012. That increase was primarily attributable to (i) a $500,000 increase in compensation expense that was due primarily to staffing increases in our commercial banking division, (ii) a $440,000 increase in professional fees, (iii) a $293,000 increase in other real estate expense that was primarily due to $1.6 million of write-downs in the carrying values of other real estate owned to their respective fair values, and (iv) a $245,000 increase in equipment and depreciation expenses incurred in connection with software and infrastructure upgrades. Those increases were partially offset by a nearly $600,000 reduction in contingency reserves made possible by favorable rulings obtained in pending litigation.

A measure of our ability to control noninterest expense is our efficiency ratio, which is the ratio of noninterest expense to net revenue (net interest income plus noninterest income). As a general rule, a lower efficiency ratio indicates an ability to generate increased revenue without a commensurate increase in the staffing and equipment and third party services and, therefore, would be indicative of greater operational efficiencies. Due to the substantial decrease in noninterest income, primarily attributable to the exit of our mortgage division from the wholesale residential mortgage business and, to a lesser extent, the increase in noninterest expense, our efficiency ratio increased to 142.0% in the three months ended March 31, 2013 from 87.1% in the corresponding three month period of 2012.

Income Tax Provision (Benefit). We recorded income tax benefit of $1.9 million, due to the pre-tax loss we incurred, in the three months ended March 31, 2013.

Financial Condition

Loans. The economic recovery regained momentum in 2012 and, as a result, gross loans totaled approximately $715 million at March 31, 2013, which represented a $26 million, or 3.8%, increase from $689 million of gross loans outstanding at March 31, 2012.

Deposits. Deposits decreased by $52 million, or 6.0%, to $816 million at March 31, 2013, from $868 million at March 31, 2012, primarily as a result of a decrease of $64 million, or 12.9%, in time deposits, partially offset by an increase in core deposits, comprised of a $17 million, or 10.3%, increase in noninterest bearing demand deposits. As a result, the volume of lower-cost core deposits increased to 47.2% of total deposits at March 31, 2013 from 43.1% at March 31, 2012, while higher-cost time deposits decreased as a percentage of total deposits to 52.7% at March 31, 2013 from 56.9% at March 31, 2012.

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