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10-Q: PACIFIC MERCANTILE BANCORP

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements Statements contained in this Quarterly Report on Form 10-Q (this "Report") that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, and our future plans, including the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," "forecast," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." The information contained in such forward-looking statements is based on current information available to us and on assumptions that we make about future economic and market conditions and other events over which we do not have control. In addition, our business and the markets in which we operate are subject to a number of risks and uncertainties. Such risks and uncertainties, and the occurrence of events in the future or changes in circumstances that had not been anticipated, could cause our financial condition or actual operating results in the future to differ materially from our expected financial condition or operating results that are set forth in the forward-looking statements contained in this Report and could, therefore, also affect the price performance of our shares. In addition to the risk of incurring loan losses and provision for loan losses, which is an inherent risk of the banking business, these risks and uncertainties include, but are not limited to, the following: deteriorating economic conditions and macroeconomic factors such as unemployment rates and the volume of bankruptcies, as well as changes in monetary, fiscal or tax policy to address the impact of COVID-19, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that the credit quality of our borrowers declines; potential declines in the value of the collateral for secured loans; the risk that steps we have taken to strengthen our overall credit administration are not effective; the risk of a recession in the United States economy, and domestic or international economic conditions, which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that our interest margins and, therefore, our net interest income will be adversely affected by changes in prevailing interest rates; the risk that we will not succeed in further reducing our remaining nonperforming assets, in which event we would face the prospect of further loan charge-offs and write-downs of other real estate owned and would continue to incur expenses associated with the management and disposition of those assets; the risk that we will not be able to manage our interest rate risks effectively, in which event our operating results could be harmed; the prospect of changes in government regulation of banking and other financial services organizations, which could impact our costs of doing business and restrict our ability to take advantage of business and growth opportunities; the risk that our efforts to develop a robust commercial banking platform may not succeed; and the risk that we may be unable to realize our expected level of increasing deposit inflows. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. Readers of this Report are encouraged to review the additional information regarding these and other risks and uncertainties to which our business is subject that is contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K") that we filed with the Securities and Exchange Commission ("SEC") on March 9, 2020, as such information may be updated from time to time in subsequent Quarterly Reports on Form 10-Q that we file with the SEC. We urge you to read those risk factors in conjunction with your review of the following discussion and analysis of our results of operations for the three and nine months ended, and our financial condition at, September 30, 2020. Due to the risks and uncertainties we face, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of this Report, or to make predictions about future performance based solely on historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this Report as a result of new information, future events or otherwise, except as may otherwise be required by law.

Overview

COVID-19 Impact







        Results of Operations
        Operating Results for the Three and Nine Months Ended September 30, 2020 and
        2019
          Our operating results for the three and nine months ended September 30, 2020,
        compared to the same period in September 30, 2019, were as follows:
                                    Three Months Ended September                               Nine Months Ended September
                                                30,                      2020 vs. 2019                     30,                      2020 vs. 2019
                                       2020              2019              % Change               2020              2019              % Change
                                                                               (Dollars in thousands)
        Interest income            $  16,016          $ 16,767                  (4.5) %       $  46,364          $ 49,399                  (6.1) %
        Interest expense               1,762             4,024                 (56.2) %           7,320            12,387                 (40.9) %
        Provision for loan and
        lease losses                       -             2,100                      N/A           9,050             5,400                  67.6  %
        Noninterest income             2,245             1,342                  67.3  %           4,510             4,219                   6.9  %
        Noninterest expense            9,275             9,697                  (4.4) %          27,925            28,388                  (1.6) %
        Income tax expense             2,138               658                 224.9  %           1,948             2,204                 (11.6) %
        Net income (loss)              5,086             1,630                 212.0  %           4,631             5,239                 (11.6) %
        


Interest Income

Nine Months Ended September 30, 2020 and 2019 Total interest income decreased 6.1% to $46.4 million for the nine months ended September 30, 2020 from $49.4 million for the nine months ended September 30, 2019. This was primarily due to a $3.5 million, or 79.9%, decrease in interest income on short-term investments for the nine months ended September 30, 2020 as compared to the same prior year period. During the nine months ended September 30, 2020 and 2019, interest income on loans was $44.8 million and $44.2 million, respectively, yielding 4.77% and 5.46% on average loan balances of $1.25 billion and $1.08 billion, respectively. The increase in the average loan balances is primarily attributable to the execution of PPP during the nine months ended September 30, 2020. Loan interest income increased despite the decrease in yield as a result of fee income from PPP loans included in interest income. The decrease in average short-term investment and loan yield is primarily attributable to the Federal Reserve Board cutting short-term interest rates by 225 basis points throughout the course of the year from August 1, 2019 through

Interest Expense

Nine Months Ended September 30, 2020 and 2019 Total interest expense decreased 40.9% to $7.3 million for the nine months ended September 30, 2020 from $12.4 million for the nine months ended September 30, 2019. The decrease was primarily due to a decrease in our cost of funds from 1.89% at September 30, 2019 to 1.10% at September 30, 2020, partially offset by an increase in the average balance of interest-bearing liabilities of $874.0 million at September 30, 2019 to $887.3 million at September 30, 2020, which consisted of deposits, borrowings and junior subordinated debentures. Our cost of funds decreased as a result of the actions of the Federal Reserve Board to cut short-term interest rates by 75 basis points throughout the year 2019 and 150 basis points during the first quarter of 2020 in response to the outbreak of COVID. The increase in our average balance of interest-bearing liabilities is primarily the result of an increase in our FHLB. Interest expense on our certificates of deposit for the nine months ended September 30, 2020 and 2019 was $4.1 million and $4.4 million, respectively, with a cost of funds of 2.11% and 2.21% on average balances of $258.5 million and $264.6 million, respectively.







                                                                                                    Three Months Ended September 30,
                                                                                     2020                                                      2019
                                                                                   Interest            Average                                Interest           Average
                                                                Average             Earned/            Yield/              Average             Earned/            Yield/
                                                                Balance              Paid               Rate               Balance              Paid               Rate
                                                                                                         (Dollars in thousands)
        Interest-earning assets
        Short-term investments(1)                            $   349,716          $     94                0.11  %       $   263,219          $  1,465               2.21  %
        Securities available for sale and stock(2)                34,852               222                2.53  %            35,105               257               2.90  %
        Loans(3)                                               1,312,502            15,700                4.76  %         1,097,646            15,045               5.44  %
        Total interest-earning assets                          1,697,070            16,016                3.75  %         1,395,970            16,767               4.77  %
        Noninterest-earning assets
        Cash and due from banks                                   19,058                                                     16,551
        All other assets                                          23,443                                                     25,295
        Total assets                                         $ 1,739,571                                                $ 1,437,816
        Interest-bearing liabilities:
        Interest-bearing checking accounts                   $   110,934          $     28                0.10  %       $   111,614          $    163               0.58  %
        Money market and savings accounts                        417,123               357                0.34  %           432,397             1,904               1.75  %
        Certificates of deposit                                  239,219             1,131                1.88  %           259,830             1,562               2.39  %
        Other borrowings                                          73,419               115                0.62  %            28,804               177               2.44  %
        Junior subordinated debentures                            17,527               131                2.97  %            17,527               218               4.93  %
        Total interest bearing liabilities                       858,222             1,762                0.82  %           850,172             4,024               1.88  %
        Noninterest bearing liabilities
        Demand deposits                                          709,391                                                    421,524
        Accrued expenses and other liabilities                    19,123                                                     17,739
        Shareholders' equity                                     152,835                                                    148,381
        Total liabilities and shareholders' equity           $ 1,739,571                                                $ 1,437,816
        Net interest income                                                       $ 14,254                                                   $ 12,743
        Net interest income/spread                                                                        2.93  %                                                   2.89  %
        Net interest margin                                                                               3.34  %                                                   3.62  %
        


(1)Short-term investments consist of Federal Funds sold and interest bearing deposits that we maintain at other financial institutions.

Table of Contents







                                                                                                    Nine Months Ended September 30,
                                                                                     2020                                                      2019
                                                                                   Interest            Average                                Interest           Average
                                                                Average             Earned/            Yield/              Average             Earned/            Yield/
                                                                Balance              Paid               Rate               Balance              Paid               Rate
                                                                                                         (Dollars in thousands)
        Interest-earning assets
        Short-term investments(1)                            $   297,636          $    894                0.40  %       $   253,058          $  4,439               2.35  %
        Securities available for sale and stock(2)                35,231               693                2.63  %            37,047               808               2.92  %
        Loans(3)                                               1,253,805            44,777                4.77  %         1,080,278            44,152               5.46  %
        Total interest-earning assets                          1,586,672            46,364                3.90  %         1,370,383            49,399               4.82  %
        Noninterest-earning assets
        Cash and due from banks                                   17,490                                                     15,741
        All other assets                                          25,540                                                     26,845
        Total assets                                         $ 1,629,702                                                $ 1,412,969
        . . .
        


Nov 06, 2020

COMTEX_374061298/2041/2020-11-06T16:42:33

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