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Aug. 13, 2021, 1:59 p.m. EDT


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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Table of Contents 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, including those regarding our proposed merger with Banc of California, Inc. ("Banc of California"), our future financial performance and our business, trends and expectations regarding 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: the possibility that the merger with Banc of California does not close when expected or at all because required regulatory, or other approvals, financial tests or other conditions to closing are not received or satisfied on a timely basis or at all; changes in Banc of California's or our stock price before closing, including as a result of the companies' financial performance prior to closing, general stock market movements, and the performance of other financial companies and peer group companies; the risk that the anticipated benefits of the merger may not be fully realized or may take longer to realize than expected, including as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which Banc of California and we operate; Banc of California's ability to promptly and effectively integrate our businesses following the merger; the reaction to the transaction of the companies' customers, employees and counterparties; diversion of management time on merger-related issues; 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, 2020 (as amended, the "2020 Form 10-K") that we filed with the Securities and Exchange Commission ("SEC") on March 15, 2021, 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 six months ended, and our financial condition at, June 30, 2021. 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. Table of Contents Recent Developments

On March 22, 2021, Pacific Mercantile Bancorp entered into an Agreement and Plan of Merger (the "Merger Agreement") with Banc of California. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Pacific Mercantile Bancorp will merge with and into Banc of California (the "Merger"), with Banc of California surviving the Merger. Promptly following the Merger, the Bank will merge with and into Banc of California's wholly-owned bank subsidiary, Banc of California, National Association, a national banking association (the "Bank Merger"). Banc of California, National Association will be the surviving bank in the Bank Merger. The Merger Agreement was adopted and approved by the Board of Directors of each of Pacific Mercantile Bancorp and Banc of California. The closing of the Merger, which is expected to occur in the third quarter of 2021, is contingent upon receipt of necessary regulatory approvals, along with the satisfaction of other customary closing conditions.


Table of Contents

        Results of Operations
        Operating Results for the Three and Six Months Ended June 30, 2021 and 2020
          Our operating results for the three and six months ended June 30, 2021,
        compared to the same period in June 30, 2020, were as follows:
                                       Three Months Ended June 30,               2021 vs. 2020               Six Months Ended June 30,                2021 vs. 2020
                                         2021                 2020                 % Change                    2021                2020                 % Change
                                                                                          (Dollars in thousands)
        Interest income            $       12,539          $ 15,580                       (19.5) %       $      26,237          $ 30,349                       (13.5) %
        Interest expense                      838             2,262                       (63.0) %               1,798             5,558                       (67.7) %
        Provision for loan and
        lease losses                            -             2,850                      (100.0)                     -             9,050                      (100.0) %
        Noninterest income                  2,865             1,171                       144.7  %               4,603             2,265                       103.2  %
        Noninterest expense                 9,193             8,934                         2.9  %              18,857            18,651                         1.1  %
        Income tax expense
        (benefit)                           1,479               800                        84.9  %               2,903              (190)                   (1,627.9) %
        Net income (loss)          $        3,894          $  1,905                       104.4  %       $       7,282          $   (455)                   (1,700.4) %

Interest Income

Six Months Ended June 30, 2021 and 2020

        Table of Contents

Interest Expense

Six Months Ended June 30, 2021 and 2020

                                                                                                      Three Months Ended June 30,
                                                                                     2021                                                      2020
                                                                                   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)                            $   257,133          $     66                0.10  %       $   322,023          $     79               0.10  %
        Securities available for sale and stock(2)                49,765               317                2.55  %            35,000               210               2.41  %
        Loans(3)                                               1,222,889            12,156                3.99  %         1,331,270            15,291               4.62  %
        Total interest-earning assets                          1,529,787            12,539                3.29  %         1,688,293            15,580               3.71  %
        Noninterest-earning assets
        Cash and due from banks                                   17,997                                                     16,622
        All other assets                                          23,438                                                     28,048
        Total assets                                         $ 1,571,222                                                $ 1,732,963
        Interest-bearing liabilities:
        Interest-bearing checking accounts                   $   193,113          $     42                0.09  %       $   103,164          $     25               0.10  %
        Money market and savings accounts                        368,367               189                0.21  %           454,877               567               0.50  %
        Certificates of deposit                                  192,307               461                0.96  %           260,354             1,371               2.12  %
        Other borrowings                                              55                 -                   -  %           122,015               130               0.43  %
        Junior subordinated debentures                            17,527               146                3.34  %            17,527               169               3.88  %
        Total interest bearing liabilities                       771,369               838                0.44  %           957,937             2,262               0.95  %
        Noninterest bearing liabilities
        Demand deposits                                          618,404                                                    606,481
        Accrued expenses and other liabilities                    17,574                                                     18,649
        Shareholders' equity                                     163,875                                                    149,896
        Total liabilities and shareholders' equity           $ 1,571,222                                                $ 1,732,963
        Net interest income                                                       $ 11,701                                                   $ 13,318
        Net interest income/spread                                                                        2.85  %                                                   2.76  %
        Net interest margin                                                                               3.07  %                                                   3.17  %

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

Table of Contents

                                                                                                      Six Months Ended June 30,
                                                                                   2021                                                       2020
                                                                                 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)                          $   229,469          $    118                0.10  %       $   271,310          $    800                0.59  %
        Securities available for sale and stock(2)              51,742               633                2.47  %            35,422               471                2.67  %
        . . .

Aug 13, 2021


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