Pacific Mercantile Bancorp Reports Net Income of $3.4 Million, and $0.18 Per Diluted Share, in the Third Quarter of 2012 Seven Consecutive Quarters of Net Income Company Release - 11/08/2012 09:00 COSTA MESA, Calif., Nov. 8, 2012 (GLOBE NEWSWIRE) -- Pacific Mercantile Bancorp (Nasdaq:PMBC) today reported its results of operations for the third quarter and nine months ended September 30, 2012.
Overview
Three Months Ended September 30, 2012. Net income increased by $2.5 million, or 294%, to $3.4 million, from $852,000 in the same three months of 2011, notwithstanding a $2.2 million increase in income taxes in this year's third quarter. At the same time, income per diluted share of common stock increased by 200% to $0.18 for the three months ended September 30, 2012, from $0.06 per diluted share of common stock for the same three months of 2011, notwithstanding a 55% increase in the weighted average number of diluted shares of common stock outstanding in this year's third quarter over the same quarter of 2011. These increases were primarily attributable to an increase in net interest income of $1.1 million, or 13.2%, to $9.3 million, and an increase in mortgage banking revenues of $7.8 million, or 543%, to $9.2 million, in each case as compared to the same three months of 2011. These increases in net interest income and mortgage banking revenues more than offset a $500,000 increase in the provision made for loan losses and a $3.6 million, or 37%, increase in noninterest expense, to $13.4 million in the three months ended September 30, 2012 from $9.8 million in the same three months of 2011.
Nine Months Ended September 30, 2012. Net income increased by $6.7 million, or 179%, to $10.5 million, or $0.61 per diluted share, from $3.8 million, or $0.33 per diluted share, in the same nine months of 2011. Those increases were primarily attributable to an increase of $18.5 million, or 517%, in mortgage banking revenues to $22.1 million, and an increase of $1.7 million, or 424%, in net gains on sales of securities, to $2.1 million, in the nine months ended September 30, 2012, in each case as compared to the same nine months of 2011. Those increases more than offset a nearly $2.0 million increase in the provision made for loan losses, and an increase of $12.7 million, or 47.6%, in non-interest expense, in each case as compared to the same nine months of 2011.
Raymond E. Dellerba, the Company's President and CEO, stated, "We are very pleased to report our 7th consecutive profitable quarter, which is a direct result of the focus, dedication, and hard work of our officers and employees. The increase in earnings in the three and nine months ended September 30, 2012, as compared to the same respective periods of 2011, reflect improvements in the operating results of all of our operating divisions. Moreover, the return on our average equity (ROE) improved to 10.9% and 14.5%, respectively, for the three and nine months ended September 30, 2012, from 4.6% and 7.5%, respectively, for the same three and nine months of 2011. At the same time, we generated returns on our average assets (ROA) in the three and nine months ended September 30, 2012 of 1.22% and 1.32%, respectively, as compared to 0.32% and 0.49%, respectively, in the same three and nine months of 2011. On the deposit side, we continue to grow our non-interest bearing deposits, which represent our lowest cost funding source and to reduce the volume of higher cost time certificates of deposit, which contributed to the improvement in our net interest income in the three and nine months ended September 30, 2012." Mr. Dellerba continued, "We also have strengthened the Bank's management team, with the recent addition of Mr. Tom Vertin, as President of the Bank's commercial banking division and look forward to his contributions to the Bank's financial performance. Mr. Vertin brings 20 plus years of banking experience in the business banking area."
Recent Developments
As we reported on August 13, 2012, we decided to focus our mortgage banking business entirely on our direct-to-consumer retail channel and to exit the wholesale mortgage banking business. Consequently, on August 31, 2012, we ceased taking mortgage submissions from mortgage brokers. Due to the volume of wholesale mortgage loan applications received or in process through August 31, 2012, we do not believe that the exit from our wholesale mortgage business materially affected our mortgage banking revenues in this year's third quarter. However, due to the exit from the wholesale mortgage business, we expect that there will be a significant decline in mortgage loan originations and mortgage banking revenues in this year's fourth quarter as compared to the first three quarters of 2012. As stated in our August 13, 2012 news release, we made this decision based on our judgment that our exit from the wholesale mortgage business will enhance the value of our banking franchise in the future by reducing and controlling our operating costs and reducing interest rate and other risks inherent in the wholesale mortgage business, thereby enabling us to build a stronger foundation for achieving consistent improvements in profitability in the future.
Results of Operation
Net Interest Income.
In the three months ended September 30, 2012, net interest income increased by $1.1 million, or 13.2%, due to a $431,000, or 3.9%, increase in interest income and a $648,000, or 23.5%, decrease in interest expense, in each case as compared to the same three months of 2011. The increase in interest income was primarily attributable to a nearly $117 million increase in the average volume of loans outstanding, including loans held for sale. The decrease in interest expense was primarily attributable to reductions in the rates of interest we were paying on time certificates of deposit, which resulted, as well, in declines in the volume of those deposits in the three months ended September 30, 2012 as compared to the same three months of 2011.
In the nine months ended September 30, 2012, net interest income was essentially unchanged from the same nine months of 2011, as a $1.9 million decrease in interest income was offset by a nearly $1.9 million reduction in interest expense that was primarily due to reductions we decided to make in the rates of interest we paid on, and a resulting decline in the volume of, time certificates of deposit.
Provision for Loan Losses. We made provisions for loan losses of $500,000 and approximately $2.0 million, respectively, in the three and nine months ended September 30, 2012, primarily due to net loan charge offs of $2.5 million and $4.9 million, respectively, in the third quarter and nine months ended September 30, 2012. The allowance for loan losses at September 30, 2012 totaled $12.7 million, or 1.83% of the loans outstanding, as compared to $15.6 million, or 2.37% of the loans outstanding at December 31, 2011. However, notwithstanding that decrease in the allowance for loan losses, 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 September 30, 2012 remained adequate to cover inherent losses in the loan portfolio.
Non-interest income. Noninterest income increased by $7.8 million to $10.0 million in the third quarter of 2012, from nearly $2.2 million in the same quarter of 2011, primarily as a result of a $7.8 million increase in income generated by our mortgage banking operations. In the nine months ended September 30, 2012, noninterest income increased by $19.7 million to $25.1 million from $5.4 million in the same nine months of 2011, due primarily to a $18.5 million increase in income generated by the mortgage banking division and a $1.7 million increase in net gains on sales of securities available for sale, somewhat offset by a $449,000 loss on sale of other real estate owned.
Non-interest expense. In the three and nine months ended September 30, 2012, noninterest expense increased by $3.6 million, or 37.1%, and $12.7 million, or 47.6%, respectively, as compared to the same three and nine months of 2011. Those increases in noninterest expense were due primarily to (i) the growth of our mortgage banking business, as we added mortgage personnel and related support staff and increased leased office space, and incurred higher marketing, business development and other costs to increase the volume of mortgage loan originations, and (ii) write-downs of $933,00 and $3.8 million, respectively, in the carrying values of other real estate owned ("OREO") to their respective fair values , in the three and nine months ended September 30, 2012. Notwithstanding the increases in noninterest expense, due to the increase in noninterest income, our efficiency ratio improved to 69.8% in the three months ended September 30, 2012 from 94% in the corresponding three months of 2011, and to 77.8% in the nine months ended September 30, 2012 from 86.4% in the same nine months of 2011. As a result of our recent exit from the wholesale mortgage business, we expect mortgage banking related noninterest expense to decline, beginning in the fourth quarter of 2012.
Income tax provision (benefit). We recorded an income tax provision of $1.9 million in the three months ended September 30, 2012, as compared to recording an income tax benefit of $225,000 for the same three months in 2011. In the nine months ended September 30, 2012, we recorded a non-cash income tax benefit of $1.3 million, as a result of the release of the remainder of the valuation allowance, in the amount of $5.0 million, during the second quarter of 2012, which we had established against our deferred tax asset by means of non-cash 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 had been generating during the 18 months that ended June 30, 2012, it had become more likely than not that we would be able to use the income tax benefits comprising our remaining deferred tax asset to offset or reduce taxes in future periods.
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